ADAPTIVE
ANNUAL
REPORT 2020
CONTENTS
MVB Financial Corp.,
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9
10
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17
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19
Our Purpose and Our How
Trust
Commitment
Respect, Love, Caring
Teamwork
Adaptive
Who We Are
Strong Financial Performance
Chairman and Directors
COVID-19 Response
A Message From Our CEO
Significant Transactions
2020 Successes
Shareholder and Contact Info
Form 10-K
the holding company of MVB Bank, Inc., is an
innovative financial holding company providing
banking services to individuals and corporate clients
in the Mid-Atlantic region, as well as Payment and
Fintech Deposit clients throughout the United States.
MVB Financial is publicly traded on The Nasdaq
Capital Market® under the ticker “MVBF.” MVB Bank’s
subsidiaries are MVB Technology, MVB Community
Development Corporation, Chartwell Compliance
and Paladin Fraud.
MVB has been rated 5-stars for 40 consecutive
quarters by BauerFinancial. DepositAccounts.com,
the largest and most comprehensive online
publication in the U.S. covering every federally
insured bank and credit union, has rated MVB
as an A+.
ADAPTIVE
At MVB, our culture is part of our corporate DNA, defining the environment
in which our Team Members thrive. Our culture impacts a wide range of
elements, including our Purpose, Core Values, behaviors and priorities that
support growth and engagement. We think bigger, and we do bigger!
Our Purpose
TRUSTED PARTNERS ON THE
FINANCIAL FRONTIER, COMMITTED
TO YOUR SUCCESS
You deserve more than a bank. You deserve a trusted partner on the financial
frontier, committed to your success. That’s who we are.
At our core, we power your potential. We strive to unlock the potential within
our shareholders, clients, Team MVB and communities. Your success is our
success. Together, we thrive.
Our How
With our biggest goal in mind – to positively impact the financial lives
of one billion people – and enabled by our culture, MVB has identified a
series of actions that keep our flywheel spinning and drive your success.
Each action feeds into the next, creating momentum that accelerates
results in growth and scale.
MVB BANK ANNUAL REPORT 2020
1
TRUST
Our highest priority remains the health and safety of each MVB Team Member. Thanks
to our forward-thinking IT Team, we were prepared for our Team Members to work
remotely when the pandemic struck. About 85% of Team MVB made the move to work
efficiently and successfully from home. This transition took a high level of trust to
execute and to maintain over the past year. Today, internal surveys show most Team
Members say their quality of life has actually improved with working remotely. Working
from home has proven to be effective for Team MVB, as we were able to make the
transition and execute on strategic initiatives and goals in the new environment.
MVB BANK ANNUAL REPORT 2020
2
COMMITMENT
At the beginning of the pandemic, our Team Members reached out to 100% of our
Commercial clients, not only to check on their wellbeing and their families, but also to
ask how we could help with their businesses, employees and customers. Team MVB
stepped up in the midst of the COVID-19 pandemic to aid our valued clients in applying
for Paycheck Protection Program (PPP) loans through the SBA and U.S. Treasury.
By providing excellent service, including working 24 hours a day to meet application
deadlines on behalf of our clients, Team MVB assisted with 455 total PPP loans with
$89.76 million in total lending, supporting more than 30,000 jobs.
Team MVB exhibited a “yes, if” mindset and made a tremendous impact in the lives
of those in our communities, illustrating what it means to truly show commitment.
The MVB Board of Directors recognized Herman DeProspero (pictured here), Christopher
Turley, Ryan Oliver, JoAnne Warco, Anthony Vasquez, all Lenders, Processors, Credit and
the entire Banking Center Team for living our Core Values.
MVB BANK ANNUAL REPORT 2020
3
RESPECT, LOVE, CARING
Throughout the pandemic, CEO Larry F. Mazza sent every single MVB Team Member encouraging
notes and small tokens of gratitude to their homes, which also helped support our local, small
businesses. For example, he sent every Team Member live flowers with a personal note. Many
Team Members responded about how much that meant to them.
“I just received the most beautiful arrangement of flowers and card. I am truly humbled to be
working for such an amazing company and more importantly the amazing people that I get to
work with and for every day. I have had multiple discussions with my Team over the past couple of
weeks, and we all realize how fortunate we are to have the ability and flexibility to work remotely
and continue to work every day when there are so many other companies that do not have that
luxury. This was totally unexpected but greatly appreciated. Thank you so much for everything that
you do!” - Kimberly J. Ice, AVP, Treasury Operations Manager
MVB BANK ANNUAL REPORT 2020
4
TEAMWORK
With one week to prepare, Team MVB stepped up in the midst of the COVID-19
pandemic to successfully execute the FDIC-assisted deal to acquire The First State Bank
of Barboursville on April 3, 2020. Team Members exceeded expectations, taking on
critical roles with a “yes, if” attitude, giving up personal time, and in some cases traveling,
to ensure a smooth transition.
MVB BANK ANNUAL REPORT 2020
5
ADAPTIVE
In 2020, MVB’s Fintech vertical expanded with investment in talent acquisition and
significant growth in noninterest-bearing deposits. With top clients in the Online Gaming
industry, MVB is poised to capture leading-edge opportunities in the Gaming space. Our
early experience and top performing client base in this arena have generated significant
referrals. We made progress in the fourth quarter of 2020 to solidify MVB’s presence,
building compliant products and services to meet the regulatory rigor required in these
industries.
Our CoRe Banking vertical also expanded in 2020 with investment in talent in SBA
Lending, as well as growth in Goverment Lending and Title and Specialty Deposits.
MVB BANK ANNUAL REPORT 2020
6
Who We Are
MVB FINANCIAL CORP.
MVB Financial Corp. is an innovative financial holding company providing banking
services to individuals and corporate clients in the Mid-Atlantic region, as well as
Payment and Fintech Deposit clients throughout the United States.
MVB Financial, the holding company of MVB Bank, is publicly traded on The
Nasdaq Capital Market® under the ticker “MVBF.” For more information about
MVB, visit ir.mvbbanking.com.
Headquartered in Fairmont, West Virginia, MVB Bank and the Bank’s subsidiaries, MVB
Technology, MVB Community Development Corporation, Chartwell Compliance and Paladin
Fraud, provide financial services to individuals and corporate clients in the Mid-Atlantic region
and beyond. MVB Bank has two main verticals, Fintech and CoRe Banking. The combination of
Commercial and Retail, CoRe Banking includes loans, deposits and non-interest income, as well
as deposits, interchange and fee income and small business loans. The MVB Bank CoRe Banking
footprint encompasses 13 total locations, 10 in West Virginia and three in Northern Virginia. MVB
Fintech Treasury & Deposit Services has a Sales Team based in Salt Lake City, Utah, and clients
from coast to coast. For more information about MVB Bank, visit www.mvbbanking.com.
MVB
TECHNOLOGY
MVB Technology is the company that holds the technology purchased from Invest Forward
dba GRAND and will be our entity for future growth and acquisition opportunities.
MVB COMMUNITY
DEVELOPMENT CORP.
The MVB Community Development Corporation, a subsidiary of MVB Bank, Inc., is committed to
the mission of transforming low-income communities, creating economic opportunities for low-
income persons and financing qualified businesses through the provision of capital investments
and lending in a manner that provides a vital impact on the lives of individuals and their
communities. For more information about MVB Community Development Corp., visit
https://mvbbanking.com/mvbs-community-development-corporation/.
Chartwell Compliance, a wholly-owned subsidiary of MVB Bank, Inc., is one of the world’s leading
specialist firms in state and federal compliance and market entry facilitation for firms entering
into or expanding in North America, serving many of the most high-profile providers of the
Fintech industry. For more information about Chartwell Compliance, visit
www.chartwellcompliance.com.
Founded by a group of insider industry experts who knew what fraud prevention can and
should be, Paladin Fraud offers an extensive and customizable suite of services for merchants,
credit agencies, Fintechs and vendors. Paladin strategizes for the long game, helping clients
and partners defend against today’s threats—and tomorrow’s. Paladin places special focus on
education and training, arming these types of organizations with the insight they need to stay on
top. Paladin joined the MVB family through its acquisition by a wholly-owned subsidiary of MVB
Bank. For more information about Paladin, visit http://paladinfraud.com/.
MVB Financial Corp. and its wholly-owned subsidiary MVB Bank, Inc. announced on July 1, 2020,
that the Bank’s subsidiary Potomac Mortgage Group, Inc. (dba MVB Mortgage) completed a
combination with Intercoastal Mortgage Company, a Van Metre Company. MVB Mortgage and
ICMC are now one of the largest independently owned residential mortgage lending operations
in the Mid-Atlantic region: Intercoastal Mortgage, LLC. MVB Bank is affiliated with MVB Mortgage,
offering a broad line of residential mortgage loan products. MVB Mortgage is a licensed trade
name of Intercoastal Mortgage, LLC. For more information, visit https://icmtg.com/.
MVB BANK ANNUAL REPORT 2020
7
Performance Numbers
28
NUMBER OF STATES WHERE
MVB TEAM MEMBERS ARE
LOCATED
22
NUMBER OF
GAMING CLIENTS
STRONG FINANCIAL
PERFORMANCE
Year Ended December 31, 2020
$533.0M
TOTAL FINTECH
RELATED DEPOSITS
254.8% INCREASE*
*Year Over Year
$357.9M
GAMING DEPOSITS,
INCLUDED IN TOTAL
FINTECH DEPOSITS
197.5% INCREASE*
Top Banks in the U.S.
by Deposit Accounts
Rank
Financial Institution
Bank of America
Well Fargo Bank
Chase Bank
US Bank
TD Bank
Navy Federal Credit Union
Citi®
Capital One
PNC Bank
Truist
USAA Bank
Regions Bank
Fifth Third Bank (OH)
Discover Bank
Customer
Accounts
118,052,260
67,495,280
63,038,730
36,881,647
21,414,397
21,151,581
20,510,153
18,758,584
18,606,251
14,252,216
12,122,989
6,809,559
6,425,610
5,963,081
State Employees’ Credit Union (NC)
5,101,824
Citizens Bank (RI)
Huntington National Bank
Ally Bank
Optum bank, Inc.
KeyBank
MVB Bank
M&T Bank
BBVA
Santander bank, N.A.
PenFed Credit Union
5,054,446
5,006,457
4,478,892
4,344,778
4,216,189
3,821,731
3,648,604
3,500,726
3,157,201
3,021,141
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2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
38.6%
in cre a s e
157.0%
in cre a s e
29.8%
in cre a s e
NET INCOME
2020
$3.13 basic & $3.06 diluted earnings per share
$37.4M
2019
$2.26 basic & $2.20 diluted earnings per share
$27.0M
NIB DEPOSITS
$715.8M
2020
NIB deposits were 36.1% of total deposits
2019
$278.5M
NIB deposits were 22.0% of total deposits
TANGIBLE BOOK VALUE
2020
$19.73
2019
$15.20
ASSET QUALITY
Net charge-offs to total loans:
2020 = 0.15%
2019 = 0.07%
Allowance for loan losses to total loans (with PPP loans):
2020 = 1.78%
2019 = 0.86%
Allowance for loan losses to total loans (without PPP loans):
2020 = 1.88%
2019 = 0.86%
Source: https://www.depositaccounts.com/banks/assets aspx?instType=&stateType=h-
q&state=&sort=totalaccounts (Data is sourced from the most recently published FDIC and NCUA
quarterly reports.)
MVB BANK ANNUAL REPORT 2020
8
FROM THE CHAIRMAN
“During the challenge of a global pandemic, MVB had the most successful year in its history. Driven by
a shared Purpose and Core Values, Team MVB adapted to the changing environment and executed on
multiple strategic initiatives to the benefit of our shareholders, communities and clients.”
“
-- Chairman David B. Alvarez
MVB BOARD OF DIRECTORS
DDaavviidd BB.. AAllvvaarreezz
Year Appointed: 2013 Chairman of the Board
President, Energy Transportation and Applied
Construction Solutions
Committees: Loan Approval, MVB CDC Board, MVB Insurance
Board (Chair), & PMG Board
C
WW.. MMaarrssttoonn ““MMaarrttyy”” BBeecckkeerr
Year Appointed: 2020
Former Chairman of the Board of QBE Insurance Group
Committees: Finance, HR & Compensation, & Nominating &
Corporate Governance
I
LLaarrrryy FF.. MMaazzzzaa
Year Appointed: 2005
President & CEO, MVB & MVB Bank
Committees: ALCO, Loan Approval, Loan Review, Paladin Fraud
Board, Chartwell Compliance Board, MVB CDC Board, MVB
CDPI Board, MVB Insurance Board, & PMG Board
N
DDrr.. KKeellllyy RR.. NNeellssoonn
Year Appointed: 2005
Physician
Committees: Nominating & Corporate Governance (Chair), HR
& Compensation, Risk & Compliance (Chair), Loan Approval,
Paladin Fraud Board, & Chartwell Compliance Board
I
JJoohhnn WW.. EEbbeerrtt
Year Appointed: 2013
President, J. W. Ebert Corporation
Committees: Audit, Finance (Chair), Nominating & Corporate
Governance, & MVB CDC Board
I
JJ.. CChhrriissttoopphheerr PPaalllloottttaa
Year Appointed: 1999
Director & CEO, Bond Insurance Agency, Inc.
Committees: Audit, ALCO (Chair), Loan Approval (Chair), Loan
Review (Chair), & Chartwell Compliance Board
I
DDaanniieell WW.. HHoolltt
Year Appointed: 2017
Co-Founder & CEO, BillGO
Committees: Nominating & Corporate Governance, Risk &
Compliance, & Paladin Fraud Board
I
I
AAnnnnaa JJ.. SSaaiinnssbbuurryy
Year Appointed: 2020
Chairman and Founder at GeoGuard and GeoComply
Committees: HR & Compensation, Nominating & Corporate
Governance, Risk & Compliance, & Paladin Fraud Board
GGaarryy AA.. LLeeDDoonnnnee
Year Appointed: 2016
Executive in Residence at the John Chambers College of
Business & Economics at WVU
Committees: Audit Finance, HR & Compensation (Chair), ALCO,
MVB CDC Board (Chair), & MVB CDPI Board (Chair), Loan
Review, PMG Board (Chair)
I
CChheerryyll DD.. SSppiieellmmaann
Year Appointed: 2019
Retired Partner, Ernst & Young
Committees: Audit (Chair), Finance, Risk & Compliance, &
Chartwell Compliance Board
I
CC Independent Chairman
NN Non-Independent Director
II
Independent Director
MVB BANK ANNUAL REPORT 2020
9
MVB COVID-19 RESPONSE
Living by Our Core Values
At MVB, we think differently. We leaned into the uncertainty
of the COVID-19 environment and safely leveraged our Core
Value of being Adaptive so that when the world returns to
its new normal, we will be positioned even stronger than
when 2020 began. Team MVB put our Purpose and Core
Values into action at the forefront of everything we did.
We are grateful for our CoRe Banking Team Members who have kept our drive-thrus
and banking centers open by appointment for clients throughout the pandemic.
Pictured here are Team Members from our Bridgeport, WV, banking center. One way
to thank our banking center Teams for their service was providing lunch each day
from local restaurants.
2020 COVID Relief Impact
. 1
$40,000 to 20 agencies across 8 counties
Partner Impact:
• 17,907 meals distributed
• 2,532 households received food boxes
• 521 households received rent or utility assistance
• 544 students impacted
• 6 mobile hotspots for students in remote areas of Marion County, WV
• 5,000 masks distributed
• 35 gallons of hand sanitizer distributed
The time and effort that MVB has invested in its Culture
Initiative provided a solid foundation to face the unprecedented
challenges presented by the COVID-19 pandemic. This effort has
ensured that Team Members remain mentally focused and highly
productive, even in a difficult environment.
MVB has thrived since March 11, 2020, when more than 85%
of our Team Members across 28 states migrated to working
remotely. Our Information Technology Team worked diligently
to position MVB so that it could seamlessly support a remote
workforce. As we continued to expand our footprint, acquiring
new organizations across the United States, the IT Team
implemented technologies to support this growth.
Exercising our Core Values, the Executive Leadership Team
made keeping our Team Members safe their top priority. Prior
to the shift to remote status, a Pandemic Response Team
was assembled and continues to meet daily to monitor Team
Member Travel and Illness Concerns/Reports as well as the ever-
changing COVID-19 landscape. The Team has also generated
procedures for Team Members, vendors, visitors and clients
and has provided signage and materials to our MVB locations
(i.e., washable masks, disposable masks, hand sanitizer, hand
sanitizer stations, disinfectant, thermometers, glass shields). The
Team enhanced the cleaning standards and frequency at all MVB
locations to ensure optimal safety for those Team Members who
continue working on site.
Team MVB experienced no layoffs or salary reductions related to
the pandemic; the organization has increased headcount over
the past year. Leadership continues to adapt with the changing
environment and show flexibility for Team Members who manage
virtual school for their children or need other accommodations.
Other existing programs such as the Team Member Emergency
Fund and the Vacation Donation Program are available to assist
Team Members with significant personal issues.
Team MVB has provided support for our clients’ financial needs
throughout the pandemic. We have maintained critical access
to banking services for our clients. Our banking center lobbies
remained open by appointment throughout 2020. We continued
to serve our clients through our drive-thrus, ATMs, ITMs, Digital
Banking, our MVB Mobile App and Telephone Banking. Several
years ago, MVB implemented ITMs, which helped with client
access and reduced banking center openings. We were able
to service our clients in a safe and contact free manner. In the
first week of April 2020, we implemented an interest payment
deferment program for our consumer and commercial clients
being impacted by COVID-19, educated our front line Team on
how to handle inquiries, and we made a request form available
on our website. Team MVB also has supported our communities.
While MVB currently gives hundreds of thousands of dollars in
contributions and sponsorships for our communities, additional
funding was allocated to try to help our neighbors.
MVB BANK ANNUAL REPORT 2020
10
A MESSAGE
FROM OUR CEO
Being adaptive has become part of our corporate DNA.
In 2019, MVB truly transformed from a traditional bank
to an independent, creative-thinking financial holding
company with a strong banking core to power our potential
for the future. In 2020, MVB leaned into the challenge
of the pandemic to make the year the most successful
of our history with record earnings.
Adaptive
There is a quote about nature attributed to Charles
Darwin: “It’s not the strongest of the species that
survives, nor the most intelligent; it is the one most
adaptable to change.”
When MVB selected being Adaptive as one of our Core
Values in 2018, we did not anticipate how critical that
mindset would be just two years later. That foundation
gave Team MVB the ability to think differently and
embrace the uncertainty of our new COVID-19
environment in 2020.
For the year ended December 31, 2020, MVB reported
net income of $37.4 million, or $3.13 basic and $3.06
diluted earnings per share. In unprecedented times, MVB
Larry F. Mazza
thrived. We completed multiple strategic transactions,
created growth in tangible book value and shareholder
value and onboarded a number of new highly talented
and experienced Team Members. I could not be more
grateful to Team MVB for what we accomplished in 2020.
I am thankful for our Executive Leadership Team who
proactively rose to the challenge of the pandemic and
put the health and safety of our Team Members first
in our decisions. I am thankful for Team MVB, many of
whom transitioned to working from home for the first
time, for their continued commitment to our clients and
communities. I am thankful for Team Members on our
front lines who have kept our banking centers open.
I am thankful for your continued support as
shareholders.
Total Assets
Net Income
1 3 % C A G R
$1,751
$1,944
$1,534
$1,419
s
d
n
a
s
u
o
h
t
n
i
$2,400
$2,200
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$2,331
$40,000
$35,000
s
d
n
a
s
u
o
h
t
n
i
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$37,411
2 4 % C A G R
$26,991
$12,912
$12,003
$7,575
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
MVB BANK ANNUAL REPORT 2020
11
Cash Dividends Per Share
$0.36
3 5 % C A G R
8 5 %
In cre ase
$0.195
$0.08
$0.10
$0.11
Consistent, Top Tier Asset Quality Through Cycles
2016
2017
2018
2019
2020
Non-Performing Loans / Total Loans
ALLL / Total Loans (Excluding PPP)
Book Value & Tangible Book Value
3.21%
3.43%
3.26%
2.47%
2.29%
0.00%
0.74% 0.88% 0.77%
0.14% 1.16% 0.99%
1.68% 1.65%
1.46%
1.17% 1.06%
0.87%
0.94%
0.88%
0.59%
0.54% 0.37%
0.64%
2.30%
1.80%
1.30%
0.80%
0.30%
1.80% 1.74% 1.66%
1.53%
1.30%
1.49%
1.34% 1.26%
1.88%
1.16% 1.09% 1.04% 0.98% 1.43%
0.92% 0.96%
0.84% 0.81%
0.91%
0.79% 0.78% 0.78% 0.86% 0.89% 0.84% 0.86%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
MVBF
Regional Peers
MVBF
Regional Peers
Regional peers defined as public institutions headquartered in West Virginia, Maryland,
Virginia, and the Washington D.C. MSA with assets between $1.0 billion and $3.0 billion.
$22
$19
$16
$13
$10
1 6 % C A G R
1 2 % C A G R
T B V :
B V :
$12.93
$13.63
$11.01
$11.80
$14.55
$12.92
$20.14
$19.73
$17.13
$15.20
2016
2017
2018
2019
2020
Book Value
Tangible Book Value
NCOs / Average Loans
1.00%
0.66%
0.81% 0.76%
0.59%
0.33%
0.25%
0.18%
0.33% 0.35%
0.42%
0.32%
0.19% 0.24% 0.21%
0.13% 0.12%
0.14%
0.25%
0.17%
0.22%
0.07%
0.12% 0.11%
0.10%
0.07%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
“Excellent historical asset quality…NPAs are a sterling 34 bps of
assets. Non-performers have been below peers for several years
Enhancing Shareholder Value
with quite impressive performance through the Great Recession.”
“defensively offensive” at a time when most banks were
- Nicholas Cucharale, Piper Sandler & Co., March 24, 2020
sitting out.
As your trusted partners, Team MVB remains committed
3.90%
2.90%
1.90%
0.90%
1.10%
-0.10%
0.54%
1.00%
0.60%
0.20%
-0.20%
Source: SEC filings and S&P Global Market Intelligence. Regional peers defined as public institutions headquartered in West Virginia, Maryland, Virginia, and the Washington D.C. MSA with assets between $1.0 billion and $3.0 billion. Peer
be in a position to add value for those who support us.
data reflects the most recent data publicly available.
MVBF
Regional Peers
to your success as shareholders, and we are pleased to
MVB continues to produce meaningful growth in both
earnings and tangible book value (TBV). TBV per share, a
• We focused on existing non-performing loans to clean the
deck to prepare for possible pandemic-related credit issues
in future quarters. We evaluated our loan loss allowance
and the impact of recent economic events and increased in
the remaining quarters as warranted.
1
non-U.S. GAAP measure, was $19.73 as of December 31,
• In March 2020, we announced that the Bank’s subsidiary
2020, an increase of $4.53, or 29.8%, from December 31,
2019. I remain committed to balancing our investment
in the future with a dividend program that shares our
success with shareholders, including issuing the $0.36
per share dividend for 2020.
Strategic Steps to Stimulate Progress
Early on in the pandemic, we looked for ways to be
adaptive, making strategic steps to stimulate progress.
COVID-19 has had a major impact on the mortgage
industry created volatility in the market, but MVB became
MVB Mortgage entered into an agreement with Intercoastal
Mortgage Company (ICMC), a Van Metre Company. MVB
Mortgage and ICMC have formed one of the largest
independently owned residential mortgage lending
operations in the Mid-Atlantic Region: Intercoastal Mortgage,
LLC.
• On April 3, 2020, we announced that MVB purchased the
deposits and certain assets of the insolvent First State Bank
through an agreement with the FDIC. As a testament to the
strength and adaptability of Team MVB in the COVID-19
environment, we managed to mobilize and close this major
deal in 28 days.
• On April 17, 2020, we announced the acquisition of Paladin
Fraud by a wholly owned subsidiary of MVB Bank. The move
further differentiated MVB’s expanding Fintech vertical with
its commitment to fraud prevention.
MVB BANK ANNUAL REPORT 2020
12
Consistent, Top Tier Asset Quality Through Cycles
Non-Performing Loans / Total Loans
ALLL / Total Loans (Excluding PPP)
3.21%
3.43%
3.26%
2.47%
2.29%
1.68% 1.65%
1.46%
1.17% 1.06%
0.87%
0.94%
3.90%
2.90%
1.90%
0.90%
1.10%
-0.10%
0.54%
0.00%
0.74% 0.88% 0.77%
0.14% 1.16% 0.99%
0.88%
0.59%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2.30%
1.80%
1.30%
0.80%
0.30%
1.80% 1.74% 1.66%
1.53%
1.30%
1.49%
1.34% 1.26%
1.88%
1.16% 1.09% 1.04% 0.98% 1.43%
0.92% 0.96%
0.84% 0.81%
0.91%
0.79% 0.78% 0.78% 0.86% 0.89% 0.84% 0.86%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
0.54% 0.37%
2019
2018
0.64%
2020
MVBF
Regional Peers
MVBF
Regional Peers
• MVB entered into a purchase agreement in November 2019
with Summit Financial Group for our four banking centers in
our East Market, and the deal closed on April 24, 2020.
• Also in April, we proactively sought an independent Kroll
Bond Rating Agency rating, and they provided MVB a BBB+
deposit rating and a BBB investment grade, which validates
our safety, soundness and strength.
1.00%
0.60%
0.20%
-0.20%
NCOs / Average Loans
1.00%
0.66%
0.81% 0.76%
0.59%
0.33%
0.25%
0.18%
0.33% 0.35%
0.42%
0.32%
0.19% 0.24% 0.21%
0.13% 0.12%
0.14%
0.25%
0.17%
0.22%
0.07%
0.12% 0.11%
0.10%
0.07%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
MVBF
Regional Peers
“Excellent historical asset quality…NPAs are a sterling 34 bps of
assets. Non-performers have been below peers for several years
with quite impressive performance through the Great Recession.”
- Nicholas Cucharale, Piper Sandler & Co., March 24, 2020
Tender Offer and Stock Repurchase
Program
In 2020, MVB was pleased to complete both a stock
buyback program and a tender offer. As part of
MVB’s modified Dutch Auction tender offer, a total of
536,490 shares of the Company’s common stock were
repurchased for an aggregate cost of approximately
$10.9 million, excluding related fees and expenses. In
connection with the announcement of the final results of
the tender offer, MVB also announced that on or before
December 31, 2021, the Company may repurchase up to
$31.9 million of additional shares of its common stock.
A total of 796,414 shares totaling $15.0 million were
repurchased in 2020.
Source: SEC filings and S&P Global Market Intelligence. Regional peers defined as public institutions headquartered in West Virginia, Maryland, Virginia, and the Washington D.C. MSA with assets between $1.0 billion and $3.0 billion. Peer
data reflects the most recent data publicly available.
Regional peers defined as public institutions headquartered in West
Virginia, Maryland, Virginia, and the Washington D.C. MSA with assets
between $1.0 billion and $3.0 billion.
1
Commercial Lending
MVB was quick to react to the economic fallout of the
COVID-19 pandemic by proactively reviewing every
commercial loan, working closely with loan clients and
implementing a daily monitoring process to fully manage
the portfolio. On the commercial lending front, we continue
to diversify our lending both through types of loans and
geographical reach. In the third quarter, we onboarded a
highly experienced team of SBA lenders to join MVB. This
well-seasoned team has a proven national lending model
that is already contributing by helping small businesses in
many areas.
Cumulative Total Shareholder Return
$210.00
$190.00
l
e
u
a
V
x
e
d
n
I
$170.00
$150.00
$130.00
$110.00
$90.00
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
MVB Financial Corp.
KBW Bank Index
Russell 2000
Assumes $100 was invested on December 31, 2015 and that all dividends were reinvested.
MVB BANK ANNUAL REPORT 2020
13
SIGNIFICANT TRANSACTIONS
FDIC-ASSISTED ACQUISITION of the First State
Bank, Barboursville, WV. Bargain purchase gain of $4.7M.
Completed on April 3, 2020.
1
PALADIN FRAUD, LLC ACQUISITION Enhance
the Fintech vertical with its commitment to fraud prevention.
Completed on April 17, 2020.
2
SALE OF FOUR Eastern Panhandle, WV, Banking Centers. Gain
on sale of $9.6M. Completed on April 24, 2020.
3
MVB MORTGAGE COMBINATION with Intercoastal
Mortgage, LLC. Formed one of the largest independently owned mortgage
lending operations in the Mid-Atlantic region. Completed on July 1, 2020.
4
INVEST FORWARD, INC; ACQUISITION Acquired the assets
of GRAND, a mobile app that incentivizes savings through digital banking.
Completed on August 7, 2020.
5
TENDER OFFER As part of MVB’s modified Dutch Action tender offer, a
total of 536,490 shares of the Company’s common stock were repurchased for
an aggregate cost of $10.9M, excluding related fees and expenses. Completed
on December 18, 2020.
6
MVB BANK ANNUAL REPORT 2020
14
Deposits
Growth in Hospitality & Gaming Deposits
$2,000
s
n
o
i
l
l
i
m
n
i
$1,500
$1,000
l
e
c
n
a
a
B
e
g
a
e
v
A
r
$1,778
5 6 % C A G R
N I B :
$1,227
$879
$922
$1,013
$500
2016
2017
2018
2019
2020
Noninterest-bearing deposits
Interest-bearing deposits
NIB deposits as a % of total deposits
40%
35%
30%
25%
20%
15%
10%
5%
0%
s
t
i
s
o
p
e
D
l
a
t
o
T
f
o
%
a
s
a
M
N
I
s
n
o
i
l
l
i
m
n
i
$400
$350
$300
$250
$200
$150
$100
$50
$-
$358
1 6 2 % C A G R
$120
$52
2018
2019
2020
Commercial lending showed momentum in the fourth
With the intent to increase noninterest income, MVB signed
quarter, including meaningful growth from our new SBA
agreements with two of the largest payment processors in
Team. Our national presence in 7A SBA loans continues to
the U.S. for card acquiring sponsorship.
rise in the industries we have targeted. Our Commercial
Lending Team followed up on the first round of PPP loans
MVB remains poised to capture leading-edge opportunities
with loan forgiveness assistance and readied for the next
in the Gaming space. Our early experience and top
round of loans.
performing client base in this arena have generated
significant referrals. We made significant progress in the
Allowance for loan losses to total loans was 1.8% as of
fourth quarter of 2020 to solidify MVB’s presence, building
December 31, 2020, an increase of 92 basis points from
compliant products and services to meet the regulatory rigor
December 31, 2019. Excluding Paycheck Protection Program
required in these industries.
(“PPP”) loans of $82.0 million which are generally fully
guaranteed by the U.S. government, allowance for loan
Fintech related deposits totaled $533.0 million as of
losses to total loans was 1.9% as of December 31, 2020, and
December 31, 2020, an increase of $382.8 million, or 254.8%,
an increase of 102 basis points from December 31, 2019.
from December 31, 2019. Gaming deposits, included in total
Fintech and Gaming
Fintech deposits, were $357.9 million as of December 31,
2020, an increase of $151.3 million, an increase of $237.6
million, or 197.5% from December 31, 2019.
Through our expanded partnership with Credit Karma, MVB
The MVB subsidiaries, Chartwell Compliance and Paladin
is now ranked as the 21st bank in the United States in terms
Fraud, are proving to be key acquisitions in deploying their
of total number of deposit accounts by FDIC and NCUA in
extensive experience in support of MVB’s industry-leading
their quarterly reports published in February 2021. We also
regulatory and compliance practices and in directly serving
currently have Gaming clients across the U.S.
many of their own clients.
The recent acquisition of technology like Invest Forward,
dba GRAND, gives MVB the ability to expand our product
Mortgage
base even more. We continue to attract high caliber talent
to augment our high-performing Team, both at the
leadership and skilled technical levels.
MVB Mortgage experienced a strong resurgence in the
second quarter, an improvement from the COVID-driven
market turmoil late in the first quarter. The mortgage
MVB BANK ANNUAL REPORT 2020
15
market remained robust through year-end. On July 1, we
hairy, audacious goal” as well – our Moonshot – which is
announced the completion of MVB Mortgage’s combination
to positively impact the financial lives of 1 billion people.
with Intercoastal Mortgage, LLC. MVB recognized a gain
Reaching that goal will take a lot of technology and a lot of
on the mortgage combination transaction of $3.3 million
A+ players. That’s what inspires us and drives us to think
during the third quarter. We have been validated in our
bigger and DO BIGGER.
long-held belief that investment in this mortgage company is
a protection against down-side risk in the cyclical mortgage
industry. Our investment strategy in Intercostal Mortgage
this past year continues to reap positive results based on
current trends in the housing and real estate markets.
Think Bigger and DO BIGGER
MVB is well positioned into 2021 with an extremely strong
balance sheet, strong capital and liquidity positions.
Continued execution in our Fintech and Gaming verticals
will give us the ability to expand our product base on the
financial frontier.
I remain grateful for our dedicated Board of Directors
and Teammates. Thank you for believing in MVB and for
In addition to our Purpose and Core Values, one
allowing us to be your trusted partners, committed to your
additional motivator drives us and gets us out of bed
success. As always, feel free to contact me directly with
every day. That’s our Moonshot. This concept goes back to
comments or questions, including ways we can assist you
1962 when JFK was U.S. President. When he talked about
or someone you know with financial needs.
the USA taking off to the moon, it seemed impossible
at the time. The Russians were well ahead of us in
technology, and it looked like they were going to dominate
space. But seven years later we did become the first
nation to land a person on the moon. MVB has a “big,
The best is yet to come,
Larry F. Mazza, President and CEO, MVB Financial Corp.
OUR MOONSHOT
To positively impact the financial lives of 1 billion people
MVB BANK ANNUAL REPORT 2020
16
FIRST
QUARTER
• Announcement of MVB Mortgage merger with Intercoastal
Biggest accomplishment of 1Q was learning to thrive in a COVID-19 environment:
• Transition to working remotely
• Keeping banking services available for our clients
• Personally checking on 100% of Commercial clients
• Offering a financial relief program to MVB consumer loan borrowers affected by the
pandemic
• Completing $89.76 million in PPP loans to help small businesses keep their employees
• Executing a plan to increase our community giving and partnership outreach
SECOND
QUARTER
• Close of Eastern Panhandle banking center sale to Summit
• Close of First State Bank acquisition
• MVB acquires Paladin Fraud
• Reached 2 million deposit accounts with Credit Kama
• Reached $200 million in Fintech deposits
• West Virginia Black Heritage Festival honors MVB Bank with award
for exemplary leadership in philanthropy
• Kroll Bond Rating provided MVB a BBB+ deposit rating and a BBB
investment grade, which validates our safety, soundness and strength
2020
SUCCESSES
THIRD
QUARTER
• Merger closes between MVB Mortgage and Intercoastal
• MVBF acquires GRAND intellectual property
• Completed First State Bank conversion
• Reached $350 million in Fintech deposits
FOURTH
QUARTER
• Started doing processing for one of the largest payment processors
• MVB Bank became a top 30
bank in the nation by volume of accounts
• SBA Team joins CoRe Banking division
• MVB has Team Members in 25 states and Israel
YEAR
END
Year-End Accomplishments:
CoRe Banking:
• Title Division – As of November 30, 2020, grew $186 million in deposits
• Specialty Deposit Division – As of December 30, 2020 grew $86 million
in deposits. This growth took place even with running off $80
million in deposits because we were unwilling to match the rate
of competitor bank
Fintech:
• Reached $1 million of Fintech non-interest income
• Reached $500 million in Fintech deposits
Talent Acquisition:
• About 140 open positions filled to date in 2020.
Of these fills, about 30 were internal moves, or about 20% filled with
internal opportunities.
MVB BANK ANNUAL REPORT 2020
17
SHAREHOLDER AND CONTACT INFORMATION
Shareholders Meeting
The Annual Meeting of Shareholders of MVB Financial Corp. (MVB) will be held at 9:00 a.m. on May 18, 2021. This
meeting is for the purpose of considering and voting upon certain proposals. Only those shareholders of record at the
close of business on March 24, 2021, shall be entitled to notice of the meeting and to vote at the meeting.
Transfer Agent & Shareholder Inquiries
The corporation’s transfer agent is Computershare. Inquiries concerning transfer requirements, lost certificates, and
change of address should be directed to:
Computershare
462 South 4th Street
Louisville, KY 40202
www.computershare.com
Investor Inquiries
Investor inquiries to the Company should be directed to:
Marcie Lipscomb
(304) 285-0020
mlipscomb@mvbbanking.com
All Other Inquiries
All other inquiries to the Company should be directed to:
MVB Financial Corp.
Attn: Investor Relations
301 Virginia Avenue
Fairmont, WV 26554
(844) MVB-BANK (844-682-2265)
Form 10-K
A copy of the MVB Financial Corp. Form 10-K for 2020, which has been filed with the SEC, is available without
attachments at no charge upon written request and is also available at http://ir.mvbbanking.com.
Inquiries should be directed to the Investor Relations contact above.
Independent Registered Accounting Firm
Dixon Hughes Goodman, LLP
809 Glen Eagles Court, Suite 200
Baltimore, MD 21286
Stock Market Listing
MVB Financial Corp. stock is traded on The Nasdaq Capital Market under the symbol: MVBF.
MVB BANK ANNUAL REPORT 2020
18
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-50567
MVB Financial Corp.
(Exact name of registrant as specified in its charter)
West Virginia
(State or other jurisdiction of
incorporation or organization)
301 Virginia Avenue, Fairmont, WV
(Address of principal executive offices)
20-0034461
(I.R.S. Employer Identification No.)
26554
(Zip Code)
Registrant’s telephone number, including area code (304) 363-4800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Common Stock, $1.00 Par Value Per Share
MVBF
Name of each exchange on
which registered
The Nasdaq Stock Market LLC
(Nasdaq Capital Market)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) Act. Yes ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Emerging growth company ☐
Smaller reporting company ☒
Non-accelerated filer ☐
Accelerated filer ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
Based upon the closing price of the common shares of the registrant on June 30, 2020 of $13.30 as reported on the Nasdaq Capital Market, the aggregate market
value of the common shares of the registrant held by non-affiliates during that time was $137,985,864. For this purpose, certain executive officers and directors
are considered affiliates. This calculation does not reflect a determination that such persons are affiliates for any other purpose.
As of March 8, 2021, the registrant had 11,568,156 shares of common stock outstanding with a par value of $1.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to the 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
2
Page
5
21
33
33
34
34
35
37
39
55
58
124
124
126
126
126
126
126
126
127
129
Forward-Looking Statements:
Statements in this Annual Report on Form 10-K that are based on other than historical data are “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current
expectations or forecasts of future events and include, among others, statements with respect to the beliefs, plans, objectives,
goals, guidelines, expectations, anticipations and future financial condition, results of operations and performance of the Company
and its subsidiaries (collectively, “we,” “our,” or “us”), including the Bank, and statements preceded by, followed by or that
include the words “may,” “could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,”
“projects,” “outlook,” or the negative of those terms or similar expressions.
These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing the
Company's view as of any subsequent date. Forward-looking statements involve significant risks and uncertainties (both known
and unknown) and actual results may differ materially from those presented, either expressed or implied, including, but not
limited to, those presented in the Management’s Discussion and Analysis section. Factors that might cause such differences
include, but are not limited to:
l the length, severity, magnitude and duration of the Coronavirus Disease (“COVID-19”) pandemic and the direct and indirect
impacts of such pandemic, including its impact on the Company’s financial condition and business operations;
l changes in the economy, which could materially impact credit quality trends and the ability to generate loans and gather
deposits, including the pace of recovery following the COVID-19 pandemic;
l ability to successfully execute business plans, manage risks and achieve objectives, including strategies related to recent
investments in Fintech;
l market, economic, operational, liquidity, credit and interest rate risks associated with the Company's business;
l changes in local, national and international political and economic conditions, including without limitation changes in the
political and economic climate, economic conditions and other major developments, including wars, natural disasters,
epidemics and pandemics, military actions and terrorist attacks;
l changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts
operations, including without limitation, reduced rates of business formation and growth, commercial and residential real
estate development and real estate prices;
l unanticipated changes in the Company's liquidity position, including but not limited to changes in access to sources of
liquidity and capital to address its liquidity needs;
l changes in interest rates;
l the quality and composition of the loan and securities portfolios;
l ability to successfully conduct acquisitions and integrate acquired businesses and potential difficulties in expanding
businesses in existing and new markets;
l ability to successfully manage credit risk and the sufficiency of allowance for credit losses;
l increases in the levels of losses, customer bankruptcies, bank failures, claims and assessments;
l changes in government legislation and accounting policies, including the Dodd-Frank Act and EGRRCPA;
l uncertainty about the discontinued use of LIBOR and the transition to an alternative rate;
l continuing competition and consolidation in the financial services industry;
l new legal claims against us, including litigation, arbitration and proceedings brought by governmental or self-regulatory
agencies or changes in existing legal matters;
l success in gaining regulatory approvals, when required, including for proposed mergers or acquisitions;
l changes in consumer spending and savings habits, including demand for loan products and deposit flow;
l increased competitive challenges and expanding product and pricing pressures among financial institutions and non-bank
financial companies;
l operational risks or risk management failures by us or critical third parties, including without limitation with respect to data
processing, information systems, cyber-security, technological changes, vendor problems, business interruptions and fraud
risk;
l failure or circumvention of internal controls;
l legislation or regulatory changes which adversely affect operations or business, including changes to address the impact of
COVID-19 through the CARES Act and other legislative and regulatory responses to the COVID-19 pandemic; and
l ability to comply with applicable laws and regulations; changes in accounting policies or procedures as may be required by
the Financial Accounting Standards Board (“FASB”) or regulatory agencies, including the impact of adoption of the new
CECL standard; and
l costs of deposit insurance and changes with respect to FDIC insurance coverage levels.
Certain risk factors that might cause actual results to differ materially from those presented are more fully described in this
Annual Report on Form 10-K within Part I, Item 1A, Risk Factors, and from time to time, in other filings with the Securities and
Exchange Commission (“SEC”). Actual results may differ materially from those expressed in or implied by any forward-looking
statement. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date
of this report. Except to the extent required by law, the Company specifically disclaims any obligation to update any factors or to
publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or
developments.
ITEM 1. BUSINESS
Corporate Overview
PART I
MVB Financial Corp. (“MVB” or the “Company”) is a financial holding company organized as a West Virginia corporation in
2003. MVB operates principally through its wholly-owned subsidiary, MVB Bank, Inc. (“MVB Bank” or the “Bank”). MVB
Bank’s subsidiaries include MVB Insurance, LLC, a title insurance company (“MVB Insurance”), MVB Community
Development Corporation (“MVB CDC”), ProCo Global, Inc. (“Chartwell,” which began doing business under the registered
trade name Chartwell Compliance), Paladin Fraud, LLC (“Paladin Fraud”) and MVB Technology, LLC (“MVB Technology”).
The Company also owns a minority interest in Intercoastal Mortgage Company, LLC (“ICM”).
MVB conducts a wide range of business activities, primarily commercial and retail (“CoRe”) banking. The Company also
continues to be involved in new innovative strategies to provide independent banking to corporate clients throughout the United
States by leveraging recent investments in financial technology (“Fintech”) related companies, as further described below. MVB
considers Fintech companies as those entities that use technology to electronically move funds.
Since the formation of the Bank, the Company has acquired a number of financial institutions and other financial services
businesses. Future acquisitions and divestitures will be consistent with the Company’s strategic direction. The Company's most
recent acquisition and divestiture activity includes the following:
l In September 2019, the Company acquired Chartwell, based from Bethesda, MD. Chartwell provides integrated regulatory
compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting,
outsourcing, testing and training solutions. Chartwell has expanded its services to both Fintech clients and banks, in
coordination with MVB Bank’s current compliance officers, to help create and implement strategy and provide expert
compliance resources with respect to new client due diligence.
l In November 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc.
(“Summit”), a subsidiary of Summit Financial Group, Inc., pursuant to which Summit purchased certain assets and assumed
certain liabilities of three Bank branch locations in Berkeley County, WV, and one Bank branch location in Jefferson County,
WV. The Company closed this transaction in April 2020.
l In March 2020, the Bank entered into an Agreement with Intercoastal Mortgage Company, a Virginia corporation
(“Intercoastal”), and each of H. Edward Dean, III, Tom Pyne and Peter Cameron, providing for the combination of the Bank's
mortgage origination services and Intercoastal. The transaction closed in July 2020. On the closing date, Intercoastal
converted into a Virginia limited liability company and the Bank contributed certain of its assets and liabilities associated with
its mortgage operations to Intercoastal as a capital contribution, in exchange for common units of a new entity, ICM,
representing 47% of the common interest of ICM, as well as $7.5 million in preferred units. The Company recognizes its
ownership interest in ICM as an equity method investment.
l In April 2020, the Bank entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation
(“FDIC”), as receiver for The First State Bank (“First State”), Barboursville, WV, providing for the assumption by the Bank
of certain liabilities and the purchase by the Bank of certain assets of First State. First State depositors automatically became
depositors of the Bank and, subject to the insurance limitations, deposits will continue to be insured by the FDIC without
interruption. In the Agreement, the Bank agreed to pay no deposit premium and to acquire the assets at a discount to book
value. The Bank also acquired three branch locations in Barboursville, Teays Valley and Huntington, WV.
l In April 2020, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin, LLC, a Washington
limited liability company.
l In August 2020, MVB Technology entered into an Asset Purchase Agreement with Invest Forward, Inc., a Delaware
corporation doing business as Grand. Pursuant to the Asset Purchase Agreement, MVB Technology acquired substantially all
the assets of Grand. The purchase price of the transaction consisted of cash totaling $1.0 million, plus the conversion of
MVB’s note with Invest Forward.
5
Business Overview
Commercial and Retail Banking
The Company’s primary business activities, which are conducted through the Bank and its subsidiaries, are primarily CoRe
banking. The Bank offers its customers a full range of products and services including:
l Various demand deposit accounts, savings accounts, money market accounts and certificates of deposit;
l Commercial, consumer and real estate mortgage loans and lines of credit;
l Debit cards;
l Cashier’s checks;
l Safe deposit rental facilities; and
l Non-deposit investment services offered through an association with a broker-dealer.
Fintech Banking
In addition to its CoRe banking activities, the Company is also involved in innovative strategies to provide independent banking
to corporate clients throughout the United States by leveraging recent investments in Fintech. The dedicated Fintech sales team is
based in Salt Lake City, UT, and specializes in providing banking services to corporate Fintech clients, with an overarching focus
on operational risk and compliance. Managing banking relationships with clients in the payments, digital savings, cryptocurrency,
crowd funding, lottery and gaming industries is complex from both an operational and regulatory perspective. The Company
holds a strategic view that the complexity of serving these industries causes them to be underserved with quality banking services
and provides the Company with a significantly expanded pool of potential customers. When serviced in a safe and efficient
manner, these industries offer an excellent source of stable, low cost deposits and non-interest income. The Company analyzes
each industry thoroughly, both from an operational and regulatory viewpoint. This business line has the potential for fee income
revenue as relationships grow.
Primary Market Areas and Customers
The Company considers its primary market area for CoRe banking services to be comprised of North Central West Virginia and
Northern Virginia, where the Bank currently operates a total of 13 full-service banking branches: ten in West Virginia and three in
Virginia. The Company considers its Fintech banking market to be customers located throughout the entire United States.
The Company believes that the current economic climate in its primary market areas reflect economic climates that are consistent
with the general national economic climate. Unemployment in the United States was 6.5%, 3.4% and 3.7% for December 2020,
2019 and 2018, respectively.
COVID-19 Pandemic
During 2020, economies throughout the world have been severely disrupted by the effects of the quarantines, business closures
and the reluctance of individuals to leave their homes as a result of the outbreak of COVID-19. The full impact of COVID-19 is
unknown and continues to evolve. The outbreak and any preventative or protective actions that the Company or its clients may
take in respect of this virus may result in a period of disruption, including the Company’s financial reporting capabilities, its
operations generally and could potentially impact the Company’s clients, providers and third parties. Please refer to Note 1 –
Summary of Significant Accounting Policies accompanying the consolidated financial statements included elsewhere in this
report.
Segment Reporting
The Company has identified three reportable segments: CoRe banking; mortgage banking; and the financial holding company.
Revenue from CoRe banking activities consists primarily of interest earned on loans and investment securities and service charges
on deposit accounts. The Fintech division, Chartwell and Paladin Fraud reside in the CoRe banking segment. Revenue from the
mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage loan origination
process. Prior to July 2020, the mortgage banking services were conducted by a subsidiary of the Bank, Potomac Mortgage Group
(“PMG”). In July 2020, the Company announced the completion of PMG’s combination with Intercoastal to form ICM. The
Company has recognized its ownership as an equity method investment, initially recorded at fair value. Income related to this
equity method investment is included in the Mortgage Banking segment. Revenue from financial holding company activities is
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mainly comprised of intercompany service income and dividends.
For more information about each of the Company’s reportable segments, please refer to Note 21 – Segment Reporting
accompanying the consolidated financial statements included elsewhere in this report.
Commercial Loans
At December 31, 2020, the Bank had outstanding approximately $1.16 billion in commercial loans, including commercial,
commercial real estate and financial loans. These loans represented approximately 80% of the total aggregate loan portfolio as of
that date.
Commercial lending entails significant additional risks as compared with consumer lending (i.e., single-family residential
mortgage lending and installment lending). In addition, the payment experience on commercial loans typically depends on
adequate cash flow of a business and thus may be subject to, to a greater extent, adverse conditions in the general economy or in a
specific industry. Loan terms include amortization schedules commensurate with the purpose of each loan, the source of
repayment and the risk involved. The primary analysis technique used in determining whether to grant a commercial loan is the
review of a schedule of estimated cash flows to evaluate whether anticipated future cash flows will be adequate to service both
interest and principal due. In addition, the Bank reviews collateral to determine its value in relation to the loan in the event of a
foreclosure.
The Bank evaluates all new commercial loans and the Credit Department facilitates an annual loan review process that ensures
that a significant portion of the commercial loan portfolio, typically a minimum of 50%, is reviewed each year under a risk-based
approach. If deterioration in credit worthiness has occurred, the Bank takes prompt action designed to assure repayment of the
loan. Upon detection of the reduced ability of a borrower to meet original cash flow obligations, the loan is considered for
possible downgrading, and may be considered classified and potentially placed on non-accrual status.
In addition to the review noted above, the commercial and credit teams performed an evaluation of the entire commercial loan
portfolio for potential short- and long-term impacts of COVID-19. Through this process, the Company identified the industries
and borrowers that were most significantly impacted by COVID-19, allowing it to implement immediate risk mitigation efforts
and provide relief where necessary to support its clients. Management will continue to monitor the portfolio for any ongoing
effects.
Residential Loans
At December 31, 2020, the Bank had approximately $288.0 million of residential real estate loans, home equity lines of credit and
construction mortgages outstanding, representing 19.8% of total loans outstanding.
The Bank generally requires that the residential real estate loan amount be no more than 80% of the purchase price or the
appraised value of the real estate securing the loan, unless the borrower obtains private mortgage insurance for the percentage
exceeding 80%. Occasionally, the Bank may lend up to 100% of the appraised value of the real estate. Loans made in this lending
category are generally one to ten year adjustable rate, fully amortizing to maturity mortgages. MVB Bank also originates fixed
rate real estate loans and generally sells these loans in the secondary market. Most real estate loans are secured by first mortgages
with evidence of title in favor of the Bank in the form of an attorney’s opinion of the title or a title insurance policy. MVB Bank
also requires proof of hazard insurance with the Bank named as the mortgagee and as the loss payee. Full appraisals are obtained
from licensed appraisers for the majority of loans secured by real estate. In addition, the Bank purchases residential real estate
loans from ICM.
Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved,
occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the
property’s value at completion of construction and the estimated cost (including interest) of construction. If the estimate of
construction cost proves to be inaccurate, MVB may advance funds beyond the amount originally committed to permit
completion of the project. Also, note that with respect to construction loans, the Bank generally makes loans to the homeowner,
rather than to the builder. At December 31, 2020, residential mortgage construction loans to individuals totaled approximately
$119.4 million with an average life of seven months and are generally refinanced to a permanent loan upon completion of the
construction.
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Competition
The Company experiences significant competition in attracting depositors and borrowers. Competition in lending activities comes
principally from other commercial banks, savings associations, insurance companies, governmental agencies, credit unions,
brokerage firms and pension funds. The primary factors in competing for loans are interest rate and overall lending services.
Competition for deposits comes from other commercial banks, savings associations, money market funds and credit unions as
well as from insurance companies and brokerage firms. Competition for deposits comes principally from other Fintech-focused
banks and neobanks, which are online-only financial institutions. The primary factors in competing for deposits are interest rates
paid on deposits, account liquidity, convenience of office location, technology offerings and overall financial condition. The
Company believes that its approach provides flexibility, which enables the Bank to offer an array of banking products and
services. ICM faces significant competition from both traditional financial institutions and other national and local mortgage
banking operations.
The Company operates under a “needs-based” selling approach that management believes has proven successful in serving the
financial needs of most customers. It is not the Company’s strategy to compete solely on the basis of interest rates. Management
believes that a focus on customer relationships and service will promote the Company's customers’ continued use of MVB's
financial products and services and will lead to enhanced revenue opportunities.
Human Capital Resources
As of December 31, 2020, the Company had 344 employees, including 334 full-time employees, located in 28 states. The
Company seeks to attract, retain and develop the most talented employees possible, regardless of location, by promoting a strong,
positive culture, maintaining a safe and healthy workplace, emphasizing open communication with management and investing in
training and education.
Culture
The Company strives to build and maintain a high-performing culture where engaged, satisfied employees embody the Company's
purpose to be “Trusted Partners on the Financial Frontier, Committed to Your Success.” This culture emphasizes the Company's
core values of trust, commitment, respect, love, caring, teamwork and being adaptive. As part of the Company’s culture initiative,
a personal and professional growth training program, called Thought Patterns for High Performance, was instituted in partnership
with The Pacific Institute (“TPI”). All new team members complete this program and there are regular updates throughout our
core training programs.
As part of the Company’s engagement with TPI, it launched a Culture BluePrint™ Survey in 2018. The results of that survey
helped the Company set a baseline for areas of improvement, with a follow up survey conducted in November 2020. Management
used the results of this most recent survey to obtain quantitative and qualitative data about the Company's current culture, identify
how our culture has changed in the last two years and consider how culture impacts the way it operates.
COVID-19 Response
Consistent with the Company's core values, safety of its team members has been a top priority during the COVID-19 pandemic. In
mid-March, 2020, more than 85% of Company team members across 28 states and two countries migrated to working remotely,
including activities of the Board of Directors, related committees and other governance activities. The Company was able to make
a relatively seamless transition to a remote working environment and attributes this to its strong focus on technology and culture
of adherence to its core values. The Company's pandemic response team continues to meet daily to monitor team member travel
and illness concerns and has also generated procedures for employees, vendors, visitors and clients, including providing signage
and materials to Company locations, including washable and disposable masks, hand sanitizer stations, disinfectant, thermometers
and glass shields. The Company enhanced the cleaning standards and frequency at all of its locations to ensure optimal safety for
those team members who continue working on site.
Management continues to adapt with the changing environment and show flexibility for employees who manage virtual school for
their children or need other accommodations.
Team Member Development
The Company remains committed to education and development for its team members. The remote work environment created
additional opportunity for virtual and online learning. In 2020, team members were assigned courses designed to support ongoing
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compliance requirements and development.
Communication, Recognition and Engagement
The Company's internal communication structure includes various opportunities for team members to interact with its CEO and
other members of the executive leadership team, including monthly all-hands town hall meetings. At the meetings, the CEO and
members of the executive leadership team present informational topics in sessions open to all team members, and sessions where
team members representing each of the Company’s locations ask questions directly of the Company’s CEO and executive
leadership team.
Supervision and Regulation
The Company, the Bank and its subsidiaries are subject to extensive regulation under federal and state banking laws. The
Company’s earnings are affected by general economic conditions, management policies, changes in state and federal laws and
regulations and actions of various regulatory authorities, including those referred to in this section. The following discussion
describes elements of an extensive regulatory framework applicable to bank holding companies, financial holding companies and
banks and contains specific information about the Company. Regulation of banks, bank holding companies and financial holding
companies is intended primarily for the protection of depositors, the insurance fund of the FDIC and the stability of the financial
system, rather than for the protection of shareholders and creditors.
In addition to banking laws, regulations and regulatory agencies, the Company is subject to various other laws, regulations,
supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and
management of the Company and the Bank and the Company’s ability to make distributions to shareholders. State and federal law
govern the activities in which the Bank engages, the investments it makes, the aggregate amount of loans that may be granted to
one borrower and other similar areas of the Bank's business. Various consumer and compliance laws and regulations also affect
the Company’s and the Bank's operations.
The following discussion is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are
described herein. Such statutes, regulations and policies are continually under review by Congress and state legislatures and
federal and state regulatory agencies. The likelihood and timing of any changes and the impact such changes may have on the
Company or the Bank is impossible to determine with any certainty. A change in statutes, regulations or regulatory policies
applicable to the Company and its subsidiaries could have a material effect on its business, financial condition or results of
operations.
Financial Regulatory Reform
During the past several years, there has been a significant increase in regulation and regulatory oversight for United States
financial services firms such as the Company, primarily resulting from the enactment of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”) in 2010. The Dodd-Frank Act is extensive, complicated and comprehensive
legislation that impacts many aspects of a banking organization, representing a significant overhaul of many aspects of the
regulation of the financial services industry. The Dodd-Frank Act implements numerous and far-reaching changes that affect
financial companies, including banks, bank holding companies and financial holding companies, such as the Company. The
Dodd-Frank Act imposes prudential regulation on depository institutions and their holding companies. As such, the Company is
subject to more stringent standards and requirements with respect to: (i) bank and non-bank acquisitions and mergers; (ii) the
“financial activities” in which it engages as a financial holding company; (iii) affiliate transactions; and (iv) proprietary trading
and investing in private equity or hedge funds, among other provisions.
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”) was enacted,
which repealed or modified certain provisions of the Dodd-Frank Act and eases regulations on all but the largest banks. These
modifications, among other changes: (i) exempt banks with less than $10 billion in assets from the ability-to-repay requirements
for certain qualified residential mortgage loans held in portfolio; (ii) eliminate the requirement for appraisals for certain real estate
transactions valued at less than $400,000 in rural areas; (iii) exempt banks that originate fewer than 500 open-end and 500 closed-
end mortgages from the Home Mortgage Disclosure Act’s expanded data disclosures; (iv) clarify that, subject to various
conditions, reciprocal deposits of another depository institution obtained using a deposit broker through a deposit placement
network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s
brokered-deposit regulations; (v) raise eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets;
and (vi) simplify capital calculations by requiring regulators to establish for institutions under $10 billion in assets a community
bank leverage ratio (tangible equity to average consolidated assets) at a percentage not less than 8% and not greater than 10% that
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upon the election of a bank would replace the risk-based capital requirements. In addition, the Board of Governors of the Federal
Reserve System (“Federal Reserve Board”) was required to raise the asset threshold under its Small Bank Holding
Company Policy Statement from $1 billion to $3 billion for bank holding companies that are exempt from consolidated capital
requirements, provided that such companies meet certain other conditions such as not engaging in significant non-banking
activities.
Certain provisions of the Dodd-Frank Act and other laws, such as the EGRRCPA, are subject to further rulemaking, guidance and
interpretation by the applicable federal regulators. New regulations and statutes are regularly proposed and/or adopted that contain
wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating and
doing business in the United States. Changes in leadership at various federal banking agencies, including the Federal Reserve
Board, can also change the policy direction of these agencies. Certain of these recent proposals and changes are described below.
The Company will continue to evaluate the impact of any new regulations so promulgated or under consideration, including
changes in regulatory costs and fees, modifications to consumer products or disclosures required by the Consumer Financial
Protection Bureau (“CFPB”) and the requirements of the enhanced supervision provisions, among others.
Regulatory Agencies
The Company is a legal entity separate and distinct from the Bank and the Bank’s wholly-owned subsidiaries. As a financial
holding company and a bank holding company, the Company is regulated under the Bank Holding Company Act of 1956, as
amended (“BHCA”), and it and its non-bank subsidiaries are subject to inspection, examination and supervision by the Federal
Reserve Board. The BHCA provides generally for “umbrella” regulation of financial holding companies such as the Company by
the Federal Reserve Board and for functional regulation of banking activities by bank regulators, securities activities by securities
regulators and insurance activities by insurance regulators. The Company is also under the jurisdiction of the SEC and is subject
to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), as administered by the SEC.
The Bank is a West Virginia state chartered bank. The Bank is not a member bank of the Federal Reserve System (“non-member
bank”). Accordingly, the West Virginia Division of Financial Institutions and the FDIC are the primary regulators of the Bank and
the Bank's subsidiaries.
Bank Holding Company Activities
In general, the BHCA limits the business of bank holding companies to banking, managing or controlling banks and other
activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. In
addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activity, or acquire
and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial
activity (as determined by the Federal Reserve Board in consultation with the Secretary of the Treasury) or (ii) complementary to
a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial
system generally (as solely determined by the Federal Reserve Board), without prior approval of the Federal Reserve Board.
Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant
banking investments. Under current federal law, as a bank holding company, the Company has elected and qualified to become a
financial holding company.
Most of the financial activities that are permissible for financial holding companies also are permissible for a bank’s “financial
subsidiary,” except for insurance underwriting, insurance company portfolio investments, real estate investments and
development and merchant banking, which must be conducted by a financial holding company. In order for a financial subsidiary
of a bank to engage in permissible financial activities, federal law requires, among other conditions, that the parent bank be well
managed and have at least a satisfactory Community Reinvestment Act rating, and the parent bank and all of its bank affiliates
must be well capitalized.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must
be “well capitalized” and “well managed” under applicable Federal Reserve Board regulations and the depository institution
subsidiaries controlled by the company must have at least a satisfactory Community Reinvestment Act rating. A depository
institution subsidiary is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the sections
captioned Capital Requirements and Prompt Corrective Action included in this Item 1. A depository institution subsidiary is
considered “well managed” if it received a composite rating of 1 or 2 and management rating of at least “satisfactory” in its most
recent examination. If a financial holding company ceases to meet these capital and management requirements, the Federal
Reserve Board’s regulations provide that the financial holding company must enter into an agreement with the Federal Reserve
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Board to comply with all applicable capital and management requirements. Until the financial holding company returns to
compliance, the Federal Reserve Board may impose limitations or conditions on the conduct of its activities, and the company
may not commence any of the broader financial activities permissible for financial holding companies or acquire a company
engaged in such financial activities without prior approval of the Federal Reserve Board. If the company does not return to
compliance within 180 days, the Federal Reserve Board may require (i) divestiture of the holding company’s depository
institutions or (ii) termination by the financial holding company of any activity that is not an activity that is permissible for bank
holding companies under section 4(c)(8) of the BHCA. If a depository institution receives a rating of less than satisfactory under
the Community Reinvestment Act, the financial holding company may not commence any additional financial activity or acquire
a company engaged in financial activity, until the bank subsidiary has achieved at least a rating of satisfactory under the
Community Reinvestment Act.
Please refer to the section captioned Community Reinvestment Act included elsewhere in this item.
The Federal Reserve Board has the power to order any bank holding company or its subsidiaries to terminate any activity or to
terminate its ownership or control of any subsidiary when the Federal Reserve Board has reasonable grounds to believe that
continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability
of any bank subsidiary of the bank holding company.
As required by the EGRRCPA, in August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability
of the Federal Reserve Board’s Small Bank Holding Company Policy Statement. The interim final rule raised the policy
statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and
loan holding company that: (i) is not engaged in significant non-banking activities; (ii) does not conduct significant off-balance
sheet activities; and (iii) does not have a material amount of debt or equity securities, other than trust-preferred securities,
outstanding that are registered with the SEC. The interim final rule provides that, if warranted for supervisory purposes, the
Federal Reserve Board may exclude a company from the threshold increase. Management believes the Company meets the
conditions of the Federal Reserve Board’s Small Bank Holding Company Policy Statement and is therefore excluded from
consolidated capital requirements and is subject to specific debt to equity ratio requirements. To be considered well capitalized, a
company subject to the Small Bank Holding Company Policy Statement must meet certain requirements, including having a debt-
to-equity ratio of 1.0:1 or less. Further, qualification as a small bank holding company allows the Company to file more
abbreviated, and less frequent, consolidated and holding company reports with the Federal Reserve. The Bank remains subject to
regulatory capital requirements administered by the federal banking agencies.
Federal Securities Regulation
The Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC
under the Exchange Act. The Company is subject to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which imposes
numerous reporting, accounting, corporate governance and business practices on companies, as well as financial and other
professionals who have involvement with the United States public markets. The Company is generally subject to these
requirements and applicable SEC rules and regulations.
Acquisitions
The BHCA, the Bank Merger Act, the Change in Bank Control Act (the “CIBCA”), West Virginia banking law, and other federal
and state statutes regulate investments in and acquisitions of commercial banks and their parent holding companies. The BHCA
requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition by a bank holding company of more
than 5.0% of the voting shares of a commercial bank or its parent holding company. Under the Bank Merger Act, the prior
approval of the FDIC or other appropriate bank regulatory authority is required for a non-member bank to merge with another
bank or purchase substantially all of the assets or assume any deposits of another bank. Under the CIBCA, a filing with the
Federal Reserve Board is required under certain circumstances if an investor acquires more than 9.9% of any class of voting
securities of a state member bank or a bank holding company. In reviewing applications seeking approval of merger and
acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public
benefits of the transactions, the capital position and managerial strength of the combined organization, the risks to the stability of
the United States banking or financial system, the applicant’s performance record under the Community Reinvestment Act (please
refer to the section captioned Community Reinvestment Act included elsewhere in this item) and its compliance with consumer
protection laws and the effectiveness of the subject organizations in combating money laundering activities and other financial
crimes.
Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation.
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Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, subject to
market share limitations and any state requirement that the target bank shall have been in existence and operating for a minimum
period of time. Under the Dodd-Frank Act, national and state-chartered banks may open an initial branch in a state other than its
home state by establishing a de novo branch at any location in such host state at which a bank chartered in such a host state could
establish a branch. Applications to establish such branches must be filed with the appropriate bank regulators.
Other Safety and Soundness Regulations
The Federal Reserve Board has enforcement powers over bank holding companies and their non-banking subsidiaries. The
Federal Reserve Board has authority to prohibit activities that represent unsafe or unsound practices or constitute violations of
law, rule, regulation, administrative order or written agreement with a federal regulator. These powers may be exercised through
the issuance of cease and desist orders, civil money penalties or other enforcement and remedial actions.
Federal and state banking regulators also have broad enforcement powers over the Bank, including the power to impose fines and
other civil and criminal penalties and to appoint a receiver in order to conserve the assets of the Bank for the benefit of depositors
and other creditors. The West Virginia Commissioner of Banking also has the authority to take possession of a West Virginia state
bank in certain circumstances, including, among other things, when it appears necessary in order to protect or preserve the assets
of that bank for the benefit of depositors and other creditors.
Anti-Money Laundering and the USA PATRIOT Act
A major focus of governmental policy on financial institution regulations in recent years has been aimed at combating money
laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “Patriot Act”) substantially broadened the scope of
United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations,
creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The Patriot Act contains
anti-money laundering measures affecting insured depository institutions and their affiliates, broker-dealers and certain other
financial institutions. Financial institutions are prohibited from entering into specified financial transactions and account
relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and
implement a written customer identification program. Financial institutions must take certain steps to assist government agencies
in detecting and preventing money laundering and report certain types of suspicious transactions. The Patriot Act includes the
International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which grants the Secretary of the United
States Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions’
operations. The United States Treasury has issued a number of regulations to implement the Patriot Act under this authority
requiring financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money
laundering and terrorist financing. Regulatory authorities routinely examine financial institutions for compliance with these
obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and
terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational
consequences for the institution, including imposing substantial money penalties and causing applicable bank regulatory
authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions
even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against
institutions found to be violating these obligations.
Office of Foreign Assets Control Regulation
The United States Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and
trade sanctions against targeted foreign countries, regimes and individuals, under authority of various laws, including designated
foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. The Company is
responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting
unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply
with these sanctions could have serious legal, financial and reputational consequences, including the imposition of financial
penalties, causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory
approval is required or to prohibit such transactions even if approval is not required.
Incentive Compensation
As part of its regular, risk-focused examination process, the Federal Reserve Board reviews the incentive compensation
arrangements of banking organizations that are not “large, complex banking organizations,” such as the Company. These reviews
are tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive
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compensation arrangements. The findings of this supervisory initiative will be included in reports of examination. Deficiencies
will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions
and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation
arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness
and the organization is not taking prompt and effective measures to correct the deficiencies.
In June 2010, the Federal Reserve Board, Office of the Comptroller of the Currency, and FDIC issued comprehensive final
guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations
do not undermine the safety and soundness of such organizations by encouraging excessive risk taking. The guidance, which
covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a
group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide
incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be
compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including
active and effective oversight by the organization’s board of directors.
In June 2016, the Federal Reserve Board, other federal banking agencies, and the SEC jointly published a proposed rulemaking
designed to strengthen the incentive-based compensation practices at covered institutions by better aligning the financial rewards
for covered persons with an institution’s long-term safety and soundness. The proposed rule uses a tiered approach that applies
provisions to covered financial institutions according to three categories of average total consolidated assets: Level 1 ($250 billion
or more), Level 2 ($50 billion to $250 billion) and Level 3 ($1 billion to $50 billion). For all covered institutions, the proposed
rule would (i) prohibit types and features of incentive-based compensation arrangements that encourage inappropriate risks
because they are “excessive” or “could lead to material financial loss” at a covered institution; (ii) require incentive-based
compensation arrangements to adhere to three basic principles: (1) a balance between risk and reward; (2) effective risk
management and controls; and (3) effective governance; and (iii) require appropriate board or directors (or committee) oversight
and record keeping and disclosures to the appropriate agency. For Level 1 and Level 2 institutions, the proposed rule would (i)
require the following: the deferral of awards for senior executive officers and significant risk takers; the subjecting of unpaid and
unvested incentive compensation to the risk of downward adjustments or forfeiture; the subjecting of paid incentive compensation
to the risk of “clawback;” establishing a board compensation committee; expanded risk-management and control standards;
additional record keeping requirements for senior executive officers and significant risk takers; and detailed policies and
procedures to ensure rule compliance; and (ii) prohibit certain inappropriate practices, including: the purchase of hedging
instruments that offset decreases in the value of incentive compensation; allowing a range of payouts that might encourage risk
taking; and basing compensation solely on comparison to peer and volume-driven incentives without regard to transaction quality
or compliance with sound risk management. The comment period ended in July 2016 and the agencies are evaluating the
comments received.
If these or other regulations are adopted in a form similar to that initially proposed, they will impose limitations on the manner in
which the Company may structure compensation for its executives.
In addition, SEC regulations require public companies, like the Company, to provide various disclosures about executive
compensation in annual reports and proxy statements and to present to their shareholders a non-binding vote on the approval of
executive compensation.
The scope and content of the United States banking regulators’ policies on incentive compensation and SEC rulemaking with
respect to executive compensation are continuing to develop.
The Volcker Rule
The Volcker Rule implements section 619 of the Dodd-Frank Act and prohibits insured depository institutions and affiliated
companies and foreign banks which engage in the banking business in the United States (together, “banking entities”) from
engaging in proprietary trading of certain securities, derivatives and commodity futures and options on these instruments, for their
own account and prohibits banking entities from investing in or sponsoring certain types of funds (“covered funds”) unless
otherwise permitted by the Volcker Rule. EGRRCPA exempts from the Volcker Rule banking entities with $10 billion or less in
total consolidated assets and have total trading assets and trading liabilities that are less than 5% of total consolidated assets. As of
July 22, 2019, the effective date for the rulemaking implementing the EGRRCPA exemption, the Company and the Bank are
below these thresholds and thus exempt from the Volcker Rule.
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Limit on Dividends
The Company is a legal entity separate and distinct from the Bank and the Bank’s wholly-owned subsidiaries. The Company’s
ability to obtain funds for the payment of dividends to its shareholders and for other cash requirements largely depends on the
amount of dividends the Bank declares. However, the Federal Reserve Board expects the Company to serve as a source of
financial and managerial strength to the Bank to reduce potential loss exposure to the Bank’s depositors and to the FDIC
insurance fund in the event the Bank becomes insolvent or is in danger of becoming insolvent or is otherwise experiencing
financial stress. Under this requirement, the Company is expected to commit resources to support the Bank, including at times
when the Company may not be in a financial position to provide such resources. Any capital loans by the Company to the Bank
would be subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of the
Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank
will be assumed by the bankruptcy trustee and entitled to priority of payment.
Accordingly, the Federal Reserve Board may require the Company to retain capital for further investment in the Bank, rather than
pay dividends to its shareholders. The Bank may not pay dividends to the Company if, after paying those dividends, the Bank
would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio
requirements. The Bank must have the approval from the West Virginia Division of Financial Institutions if a dividend in any year
would cause the total dividends for that year to exceed the sum of the current year’s net earnings and the retained earnings for the
preceding two years, less required transfers to surplus. These provisions could limit the Company’s ability to pay dividends on its
outstanding common shares.
In addition, the Company and the Bank are subject to other regulatory policies and requirements relating to the payment of
dividends, including requirements to maintain adequate capital above regulatory minimums (please refer to the Capital
Requirements section below). The appropriate federal regulatory authority is authorized to determine under certain circumstances
relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have stated that paying dividends
that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking
organizations should generally pay dividends only out of current operating earnings. In addition, in the current financial and
economic environment, the Federal Reserve Board has indicated that bank holding companies should carefully review their
dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are
very strong.
Transactions with Affiliates
Transactions between the Bank and its subsidiaries, or the Company or any other subsidiary of the Company, are regulated under
federal banking law. The Federal Reserve Act, made applicable to the Bank by section 8(j) of the Federal Deposit Insurance Act
(the “FDIA”), imposes quantitative and qualitative requirements and collateral requirements on “covered transactions” by the
Bank with, or for the benefit of, its affiliates and generally requires those transactions to be on terms at least as favorable to the
Bank as if the transaction were conducted with an unaffiliated third-party. Covered transactions are defined by the Federal
Reserve Act to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets
(unless otherwise exempted by the Federal Reserve Board) from the affiliate, certain derivative transactions that create a credit
exposure by a bank to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan and the issuance of a
guarantee, acceptance or letter of credit on behalf or for the benefit of an affiliate. In general, any such transaction by the Bank or
its subsidiaries must be limited to certain thresholds on an individual and aggregate basis and, for credit transactions with any
affiliate, must be secured by designated amounts of specified collateral.
Federal law also limits a bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to
entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are
substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the
normal risk of non-repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit
extended to such persons individually and in the aggregate.
Capital Requirements
The Bank is required to comply with applicable capital adequacy standards established by the FDIC (the “Capital Rules”). The
Company is exempt from the Federal Reserve Board’s capital adequacy standards as it believes it meets the requirements of the
Small Bank Holding Company Policy Statement. State chartered banks, such as the Bank, are subject to similar capital
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requirements adopted by the West Virginia Division of Financial Institutions.
The Capital Rules, among other things: (i) include a “Common Equity Tier 1” (“CET1”) measure; (ii) specify that Tier 1 capital
consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) define CET1 narrowly by
requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of
capital; and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations.
Under the Capital Rules, the minimum capital ratios effective as of January 1, 2015 are:
l 4.5% CET1 to risk-weighted assets;
l 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
l 8.0% total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
l 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage
ratio”).
The Capital Rules also include a “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-
weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and
increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019. The Capital Rules also provide for a
“countercyclical capital buffer” that is only applicable to certain covered institutions and does not have any current applicability
to the Company or the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and
effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of CET1 to risk-
weighted assets below the effective minimum (4.5% plus the capital conservation buffer of 2.5% and, if applicable, the
countercyclical capital buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of
the shortfall.
Since fully phased in on January 1, 2019, the Capital Rules require the Bank to maintain an additional capital conservation buffer
of 2.5% of CET1, effectively resulting in minimum ratios of: (i) CET1 to risk-weighted assets of at least 7%; (ii) Tier 1 capital to
risk-weighted assets of at least 8.5%; (iii) a minimum ratio of Total capital to risk-weighted assets of at least 10.5%; and (iv) a
minimum leverage ratio of 4%. The Capital Rules also provide for a number of deductions from and adjustments to CET1.
The Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the
general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the
assets, generally ranging from 0% for United States government and agency securities, to 600% for certain equity exposures, and
resulting in higher risk weights for a variety of asset categories.
In September 2017, the Federal Reserve Board, along with other bank regulatory agencies, proposed amendments to its capital
requirements to simplify certain aspects of the capital rules for community banks, including the Bank, in an attempt to reduce the
regulatory burden for such smaller financial institutions. In July 2019, the bank regulatory agencies finalized the rule which
applies to banking organizations with less than $250 billion in total consolidated assets and less than $10 billion in total foreign
exposure. The rule simplifies the capital treatment for mortgage servicing assets, certain deferred tax assets, investments in the
capital instruments of unconsolidated financial institutions and minority interest. The rule also allows bank holding companies to
redeem common stock without prior approval unless otherwise required. Generally, the final rule is effective as of April 1, 2020;
however, banking organizations are permitted to use this simpler regulatory capital requirements as of January 1, 2020.
In June 2016, the FASB issued an update to the accounting standards for credit losses that included the Current Expected Credit
Losses (“CECL”) methodology, which replaces the existing incurred loss methodology for certain financial assets. CECL became
effective for certain entities on January 1, 2020. In December 2018, the federal bank regulatory agencies approved a final rule
providing an option to phase-in, over a period of three years, the day-one regulatory capital effects resulting from the
implementation of CECL. This standard is effective for the Company in 2023.
Notwithstanding the foregoing, the EGRRCPA simplifies capital calculations by requiring regulators to establish for insured
depository institutions under $10 billion in assets a community bank leverage ratio (“CBLR”) (tangible equity to average
consolidated assets) at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the
general applicable risk-based capital requirements under the Capital Rules. Such institutions that meet the CBLR will
automatically be deemed to be well-capitalized, although the regulators retain the flexibility to determine that the institution may
not qualify for the CBLR test based on the institution’s risk profile. In November 2019, the federal bank regulators issued a final
rule on the CBLR, setting the minimum required CBLR at 9%. Depository institutions and depository institution holding
companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio
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(equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, will be eligible to opt into the CBLR
framework. Banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9%
will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulators’ capital
rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the
FDIA. The final rule was effective on January 1, 2020 and the CBLR framework was available for banks to use beginning in their
March 31, 2020 Call Report. The Bank did not elect to apply the CBLR framework in its March 31, 2020 Call Report, but plans to
apply the framework in the March 31, 2021 Call Report.
Prompt Corrective Action
The FDIA requires among other things, that the federal banking agencies to take “prompt corrective action” in respect of
depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A
depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and
certain other factors, as established by regulation. The relevant capital measures, which reflect changes under the Capital Rules
that became effective on January 1, 2015, are the total capital ratio, the CET1 capital ratio, the Tier 1 capital ratio and the leverage
ratio.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio
of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater and a leverage ratio of 5.0% or greater, and is not subject to
any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital
measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1 capital ratio
of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 4.0% or greater and is not “well
capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1 capital ratio
less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv) “significantly
undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less than 3.0%, a Tier
1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the
institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded
to, or deemed to be within, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe
or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital
category is determined solely for the purpose of applying prompt corrective action regulations and the capital category may not
constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
As noted above, the EGRRCPA eliminated these risk-based capital requirements for banks with less than $10.0 billion in assets
who elect to follow the CBLR.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or
paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.”
“Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies
may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely
to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the
depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan.
The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding
company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became
undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance
with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it will thereafter be treated as if it is “significantly undercapitalized” until such
capital deficiency is corrected.
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including
orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a
receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository
institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking
agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the
institution to be engaging in one or more unsafe or unsound practices. The appropriate agency is also permitted to require an
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adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the
next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory
information other than the capital levels of the institution.
In addition to the “prompt corrective action” directives, failure to meet capital guidelines may subject a banking organization to a
variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of
deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.
For further information regarding the capital ratios and leverage ratio of the Company and the Bank, please refer to the discussion
under the section captioned Capital and Stockholders’ Equity included in Item 7 – Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 15 – Regulatory Capital Requirements accompanying the consolidated
financial statements included elsewhere in this report.
Safety and Soundness Standards
The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal
controls, information systems and internal audit systems, cybersecurity, liquidity, data protection, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits
and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the federal bank
regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation
as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer,
employee, director or principal stockholder.
In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been
given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an
acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action”
provisions of the FDIA. Please refer to the Prompt Corrective Action section above. If an institution fails to comply with such an
order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties and cease and desist
orders.
Deposit Insurance
The Bank’s deposits are insured by the FDIC up to the limits set forth under applicable law. The FDIC imposes a risk-based
deposit premium assessment system that determines assessment rates for an insured depository institution based on an assessment
rate calculator, which is based on a number of elements to measure the risk each insured depository institution poses to the FDIC
insurance fund. The assessment rate is applied to total average assets, less tangible equity, as defined under the Dodd-Frank Act.
The assessment rate schedule can change from time to time at the discretion of the FDIC, subject to certain limits. Under the
current system, premiums are assessed quarterly.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of
depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for
administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If
an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead
of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the
parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
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Federal Home Loan Bank Membership
The Federal Home Loan Bank (“FHLB”) provides credit to its members in the form of advances. As a member of the FHLB of
Pittsburgh, the Bank must maintain an investment in the capital stock of that FHLB in an amount equal to 0.10% of the calculated
Member Asset Value (“MAV”), plus 4.0% of outstanding advances and 0.75% of outstanding letters of credit. The MAV is
determined by taking line item values for various investment and loan classes and applying an FHLB haircut to each item. At
December 31, 2020, the Bank held capital stock of FHLB in the amount of $2.8 million.
Federal and State Consumer Laws
The Company and the Bank are subject to a number of federal and state consumer protection laws that extensively govern the
Company's relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act,
the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the
Home Mortgage Disclosure Act (“HMDA”), the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt
Collection Practices Act, the Service Members Civil Relief Act and these federal laws’ respective state-law counterparts, as well
as state usury laws and state and federal laws regarding unfair and deceptive acts and practices. These and other federal laws,
among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights,
prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections,
prohibit unfair, deceptive and abusive practices, restrict the Company's ability to raise interest rates and subject it to substantial
regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation
brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general
and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and
other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each
jurisdiction in which the Company operates and civil money penalties. Failure to comply with consumer protection requirements
may also result in the Company's failure to obtain any required bank regulatory approval for merger or acquisition transactions it
may wish to pursue or its prohibition from engaging in such transactions even if approval is not required.
The CFPB is a federal agency responsible for implementing federal consumer protection laws. The CFPB has broad rulemaking
authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to
prohibit “unfair, deceptive or abusive” acts and practices. The Dodd-Frank Act permits states to adopt consumer protection laws
and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys
general to enforce compliance with both the state and federal laws and regulations. The CFPB also has examination and
enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates, which authority would not
apply to the Company or the Bank. As the Bank’s principal federal regulator, the FDIC has examination and enforcement
authority over the Bank.
The CFPB has concentrated much of its rulemaking efforts on a variety of mortgage-related topics required under the Dodd-Frank
Act, including mortgage origination disclosures, minimum underwriting standards and ability to repay, high-cost mortgage
lending and servicing practices. The CFPB issued final rules changing the reporting requirements for lenders under the HMDA.
The new rules expand the range of transactions subject to these requirements to include most securitized residential mortgage
loans and credit lines. The rules also increase the overall amount of data required to be collected and submitted, including
additional data points about the loans and borrowers. The expanded data is being collected as of January 1, 2018.
Financial Privacy
Federal law currently contains extensive customer privacy protection provisions, including substantial customer privacy
protections provided under the Financial Services Modernization Act of 1999 (commonly known as the Gramm-Leach-Bliley
Act). Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship
and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal
financial information. These provisions also provide that, except for certain limited exceptions, an institution may not provide
such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be
so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense,
except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or
deceptive means. In December 2015, Congress amended the Gramm-Leach-Bliley Act privacy provisions to include an exception
under which a financial institution is not required to provide annual privacy notices to customers if such financial institution meets
certain conditions. In August 2018, the CFPB finalized a rule implementing this provision and that rule became effective
September 17, 2018.
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Automated Overdraft Payment Regulation
Federal regulators have adopted consumer protection regulations and guidance related to automated overdraft payment programs
offered by financial institutions. Regulation E prohibits financial institutions from charging consumers fees for paying overdrafts
on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service
for those types of transactions. Financial institutions must also provide consumers with a notice that explains the financial
institution’s overdraft services, including the fees associated with the service and the consumer’s choices. In addition, FDIC-
supervised institutions must monitor overdraft payment programs for “excessive or chronic” customer use and undertake
“meaningful and effective” follow-up action with customers that overdraw their accounts more than six times during a rolling 12-
month period. Financial institutions must also impose daily limits on overdraft charges, review and modify check-clearing
procedures, prominently distinguish account balances from available overdraft coverage amounts and ensure board and
management oversight regarding overdraft payment programs.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their
market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet
the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and
communities. The CRA requires the Bank’s primary federal bank regulatory agency, the FDIC, to assess the Bank’s record in
meeting the credit needs of the communities served by the Bank, including low- and moderate-income neighborhoods and
persons. Institutions are assigned one of four ratings: (i) “Outstanding,” (ii) “Satisfactory,” (iii) “Needs to Improve” or (iv)
“Substantial Noncompliance.”
In order for a financial holding company to commence any new activity permitted by the BHCA, or to acquire any company
engaged in any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding
company must have received a rating of at least “Satisfactory” in its most recent examination under the CRA. Furthermore,
banking regulators take into account CRA ratings when considering a request for an approval of a proposed transaction to
consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch
office.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial
institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management
processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate
customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s
management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption
and maintenance of the institution’s operations after a cyberattack involving destructive malware. A financial institution is also
expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network
capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyberattack. If the
Company fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial
penalties.
In the ordinary course of business, the Company relies on electronic communications and information systems to conduct its
operations and to store sensitive data. The Company employs a variety of preventative and detective tools to monitor, block and
provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the
Company's defensive measures, the threat from cyberattacks is severe, attacks are sophisticated and increasing in volume and
attackers respond rapidly to changes in defensive measures. While to date, the Company is not aware of it having experienced a
significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, its systems and those
of its customers and third-party service providers are under constant threat and it is possible that it could experience a significant
event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due
to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile
banking and other technology-based products and services by the Company and its customers. For further discussion of risks
related to cybersecurity, please refer to Item 1A – Risk Factors included elsewhere in this report.
Monetary Policy and Economic Conditions
The business of financial institutions is affected not only by general economic conditions, but also by the policies of various
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governmental regulatory agencies, including the Federal Reserve Board. The Federal Reserve Board regulates money and credit
conditions and interest rates to influence general economic conditions primarily through open market operations in United States
government securities, changes in the discount rate on bank borrowings and changes in the reserve requirements against
depository institutions’ deposits. These policies and regulations significantly affect the overall growth and distribution of loans,
investments and deposits and the interest rates charged on loans, as well as the interest rates paid on deposit accounts.
The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of financial institutions
in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the
economy and the money markets and the activities of monetary and fiscal authorities, the Company cannot predict future changes
in interest rates, credit availability or deposit levels.
Effect of Environmental Regulation
The Company’s primary exposure to environmental risk is through its lending activities. In cases when management believes
environmental risk potentially exists, the Company mitigates its environmental risk exposures by requiring environmental site
assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than
normal potential for environmental impact, as determined by reference to present and past uses of the subject property and
adjacent sites. Environmental assessments are typically required prior to any foreclosure activity involving non-residential real
estate collateral. With regard to residential real estate lending, management reviews those loans with inherent environmental risk
on an individual basis and makes decisions based on the dollar amount of the loan and the materiality of the specific credit. The
Company does not currently anticipate any material effect on anticipated capital expenditures, earnings or competitive position as
a result of compliance with federal, state or local environmental protection laws or regulations.
Other Regulatory Matters
The Company is subject to examinations and investigations by federal and state banking regulators, as well as the SEC, various
taxing authorities and various state regulators. The Company periodically receives requests for information from regulatory
authorities in various states, including state insurance commissions and state attorneys general, securities regulators and other
regulatory authorities, concerning the Company’s business and accounting practices. Such requests are considered incidental to
the normal conduct of business.
Future Legislation and Regulation
From time to time, Congress may enact legislation that affects the regulation of the financial services industry and state
legislatures may enact legislation affecting the regulation of financial institutions chartered by or operating in those states. Federal
and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which
existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof,
cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure under which the
Company operates and may significantly increase costs, impede the efficiency of internal business processes, require an increase
in regulatory capital, require modifications to the Company's business strategy or limit its ability to pursue business opportunities
in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or any of its subsidiaries
could have a material, adverse effect on the Company's business, financial condition and results of operations.
Corporate and Available Information
The Company files reports with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and any other filings required by the SEC. The Company makes available through its website (http://
www.mvbbanking.com), free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and all amendments to those reports, as soon as reasonably practicable after it electronically files such material with, or
furnish it to, the SEC. The information on the Company's website is not incorporated by reference into this Annual Report on
Form 10-K or in any other report or document its files with the SEC.
The public may read and copy any materials the Company files with or furnishes to the SEC at the SEC’s Public Reference Room
at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room
by calling the SEC at (800) SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC.
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ITEM 1A. RISK FACTORS
The following discussion sets forth some of the more important risk factors that could materially affect the Company's financial
condition, results of operations, business and prospects. Other factors that could affect the Company’s financial condition and
operations are discussed in the Forward-Looking Statements at the beginning of this report.
The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties that
management is not aware of or that management currently deems immaterial may also affect the Company's business operations.
You should carefully consider the risks and uncertainties described below together with all of the information included or
incorporated by reference in this Annual Report on Form 10-K, which is qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Company's business, financial condition and results of operations could be
materially and adversely affected.
References to “we,” “us,” and “our” in this Risk Factors section refer to the Company and its subsidiaries, including the Bank,
unless otherwise specified or unless the context otherwise requires.
Risks Related to Economic and Market Conditions
The Company may continue to face risks related to the COVID-19 pandemic.
The full impact of COVID-19 is unknown and rapidly evolving. The outbreak and any preventative or protective actions that the
Company or its clients may take in respect of the virus may result in a period of disruption, including the Company’s financial
reporting capabilities and its operations, and could potentially impact the Company’s clients, providers and third parties. The
spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction
in overall business activity and financial transactions, supply chain disruptions and overall economic and financial market
instability. In response to the pandemic, many states, including those where the Company primarily operates, have taken
preventative and protective actions, such as imposing restrictions on travel and business operations, advising or requiring
individuals to limit or forego time outside of their homes and ordering temporary closures of businesses that have been deemed to
be non-essential.
The COVID-19 pandemic had an impact on the Company’s operations during fiscal year 2020 and the Company expects that the
pandemic may continue to materially affect the Company’s business, financial condition and results of operations during 2021.
The extent to which the COVID-19 pandemic impacts the Company’s future operating results will depend on future
developments, which are highly uncertain and cannot be predicted, including the efficacy and distribution of COVID-19 vaccines
and governmental actions to contain the virus or treat its impact, among others. Banking and financial services have been
designated essential businesses; therefore, the Company’s operations are continuing. The ultimate effects of COVID-19 on the
broader economy and the markets that the Company serves are not fully known, nor is the ultimate length of the restrictions
described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the federal funds rate,
which may negatively affect the Company's interest income, and therefore, earnings, financial condition and results of operations.
In March 2020, the Company announced programs to support its customers during the COVID-19 pandemic. A number of
borrowers have enrolled in programs to defer all loan payments for periods up to six months. These programs may negatively
impact revenue and other results of operations in the near term and, if not effective in mitigating the effect of COVID-19 to
clients, may adversely affect the business and results of operations more substantially over a longer period of time.
The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading
prices for many other securities. The further spread of the COVID-19 pandemic, as well as ongoing or new governmental,
regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally
and in the areas in which the Company operates. This could result in further decline in demand for banking products and services
and could negatively impact, among other things, liquidity, regulatory capital and future growth. Any one or more of these
developments could have a material adverse effect on the business, financial condition and results of operations.
The Company is taking precautions to protect the safety and well-being of its customers and employees. However, no assurance
can be given that the steps being taken will be adequate or deemed to be appropriate, nor can the Company predict the level of
disruption which will occur to the Company's employees’ ability to provide the expected level of client support and service. If the
Company is unable to recover from a business disruption on a timely basis, its business, financial condition and results of
operations could be materially and adversely affected. The Company may also incur additional costs to remedy damages caused
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by such disruptions, which could further adversely affect the business, financial condition and results of operations.
The extent to which COVID-19 impacts the Company's business, results of operations and financial condition will depend on
future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread
of the pandemic, its severity, the actions to contain the virus or treat its impact and how quickly and to what extent normal
economic and operating conditions can resume. Even after COVID-19 has subsided, the Company may continue to experience
materially adverse impacts to its business as a result of the virus’ global economic impact, including the availability of credit,
adverse impacts on liquidity and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may
have and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. The full extent is not yet
known and the Company cannot predict the full extent of the impacts on its business, operations or the global economy as a
whole.
The Company may be adversely affected by the emergency actions taken by the United States government to mitigate
the impact of the COVID-19 pandemic on the United States economy.
The United States government has taken a number of actions to mitigate the impact of the COVID-19 pandemic on the United
States economy. Among other steps taken, the Federal Reserve cut the federal funds rate in March 2020, and also lowered the
interest rate on emergency lending at the Discount Window and lengthened the term of loans to 90 days. In March 2020, the
Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. Key provisions of the CARES Act
include one-time payments to individuals, strengthened unemployment insurance, additional health-care funding, loans and grants
to certain businesses and temporary amendments to the Internal Revenue Code. The Small Business Administration (“SBA”) was
tapped to lead the effort to loan funds to small businesses, in conjunction with banks. The Federal Reserve and the United States
Treasury have also responded with lending programs under the CARES Act. Further, the Federal Reserve has intervened with a
number of credit facilities intended to keep the capital markets liquid.
There can be no assurance that these interventions by the United States government will be successful in mitigating the impact of
the COVID-19 pandemic and it is unclear what the cumulative effect of these extraordinary actions by the United States
government will be on the economy as a whole and upon the financial condition and results of operations of the Company and its
clients, both in the short- and long-term.
The Company's business depends upon the general economic conditions of the State of West Virginia and the
Commonwealth of Virginia, and may be adversely affected by downturns in these and the other local economies in
which it operates.
The Company's financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of
outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services it
offers, is highly dependent upon the business environment in the markets where it operates, including the State of West Virginia,
the Commonwealth of Virginia and the United States as a whole. A favorable business environment is generally characterized by,
among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor
confidence and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in
economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of
credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other
factors.
Continued economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes
in consumer and business spending, borrowing and savings habits. Such conditions, combined with continued oil price volatility,
could have a material adverse effect on the credit quality of the Company's loans and its business, financial condition and results
of operations.
The Company's success depends primarily on the general economic conditions of West Virginia and Virginia and the specific
local markets in which it operates. Unlike larger national or other regional banks that are more geographically diversified, the
Company provides banking and financial services primarily to customers across West Virginia and Virginia. The local economic
conditions in these areas have a significant impact on the demand for the Company's products and services as well as the ability of
its customers to repay loans, the value of the collateral securing loans and the stability of its deposit funding sources. Moreover,
approximately 29.2% of the securities in the Company's municipal securities portfolio were issued by political subdivisions or
agencies within West Virginia and Virginia. A significant decline in general economic conditions in West Virginia or Virginia,
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whether caused by recession, inflation, unemployment, changes in crude oil prices, changes in securities markets, acts of
terrorism, outbreak of hostilities or other international or domestic occurrences or other factors could impact these local economic
conditions and, in turn, have a material adverse effect on the Company's business, financial condition and results of operations.
A significant portion of the Company's loans are secured by real estate concentrated in the State of West Virginia and
the Commonwealth of Virginia, which may adversely affect its earnings and capital if real estate values decline.
Nearly 68.5% of the Company's total loans are real estate interests (residential, non-residential including both owner-occupied and
investment real estate and construction and land development) mainly concentrated in West Virginia and Virginia, a relatively
small geographic area. As a result, declining real estate values in these markets could negatively impact the value of the real estate
collateral securing such loans. If the Company is required to liquidate a significant amount of collateral during a period of reduced
real estate values in satisfaction of any non-performing or defaulted loans, its earnings and capital could be adversely affected.
Severe weather, natural disasters, pandemics, epidemics, acts of war or terrorism or other external events could have
significant effects on the Company's business.
Severe weather and natural disasters, including tornados, drought and floods, epidemics and pandemics, acts of war or terrorism
or other external events or the fear of such events could have a significant effect on the Company's ability to conduct business.
Such events could affect the stability of its deposit base; impair the ability of borrowers to repay outstanding loans, impair the
value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause additional expenses.
Although management has established disaster recovery and business continuity policies and procedures, the occurrence of any
such event could have a material adverse effect on the Company's business, which, in turn, could have a material adverse effect on
its financial condition and results of operations.
The COVID-19 pandemic, trade wars, tariffs and similar events and disputes, domestic and international, have adversely affected,
and may continue to adversely affect economic activity globally, nationally and locally. Market interest rates have declined
significantly. Such events also may adversely affect business and consumer confidence generally. The Company and its
customers, and respective suppliers, vendors and processors may be adversely affected. Any such adverse changes may adversely
affect the Company's profitability, growth, asset quality and financial condition.
The ongoing COVID-19 outbreak and its dynamic nature, including uncertainties relating to the ultimate geographic spread of the
virus, the severity of the disease, the duration of the outbreak and actions that may be taken by governmental authorities to contain
the outbreak or to treat its impact has affected and will likely continue to affect the Company's business and results of operations.
The COVID-19 pandemic has caused changes in the behavior of customers, businesses and their employees, including illness,
quarantines, social distancing practices, cancellation of events and travel, business and school shutdowns, reduction in
commercial activity and financial transactions, supply chain interruptions, increased unemployment and overall economic and
financial market instability. The Federal Reserve stated in late February 2020 that it was closely monitoring COVID-19
developments and their effects on the economic outlook, and would act appropriately to support the economy. In March 2020, the
Federal Reserve reduced the target federal funds rate by 150 basis points to between 0.0% to 0.25%. The Federal Reserve also
announced it was purchasing Treasury bills until the economy reaches full employment and inflation stays at 2% and will
continue to reinvest amounts of principal received by the Federal Reserve on its portfolio of treasury and agency debt and
mortgage-backed securities. Lastly, the Federal Reserve also reduced the interest it pays on excess reserves from 1.10% to 0.10%.
The Company expects that such reductions in interest rates will adversely affect its net interest income, margins and profitability.
Risks Related to the Company's Business
As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company is subject to additional
risks of litigation from clients or other parties regarding its processing of loans for the PPP and risks that the SBA
may not fund some or all PPP loan guarantees.
In March 2020, the CARES Act was signed into law and included a $349 billion loan program administered through the SBA
referred to as the PPP. Under the PPP, which opened in April 2020, small businesses and other entities and individuals can apply
for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous
limitations and eligibility criteria. The Bank is participating as a lender in the PPP. Because of the short timeframe between the
passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the
operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. In mid-April, 2020, the SBA
notified lenders that the $349 billion earmarked for the PPP was exhausted. Later in April 2020, an additional $310 billion of PPP
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loan funding was authorized. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the
process and procedures that such banks used in processing applications for the PPP. The Company may be exposed to the risk of
litigation, from both clients and non-clients that contacted the Bank regarding PPP loans, regarding the process and procedures
used in processing applications for the PPP. If any such litigation is filed against the Company and is not resolved in a favorable
manner, it may result in significant financial liability or adversely affect the Company's reputation. In addition, litigation can be
costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation
could have a material adverse impact on the Company's business, financial condition and results of operations.
The Company also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in
which the loan was originated, funded or serviced, such as an issue with the eligibility of a borrower to receive a PPP loan, which
may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a
loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the
PPP loan was originated, funded or serviced, the SBA may deny its liability under the guaranty, reduce the amount of the
guaranty or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency.
The Company's non-residential real estate loans expose it to greater risks of non-payment and loss than residential
mortgage loans, which may cause it to increase its allowance for loan losses, which would reduce net income.
At December 31, 2020, $1.17 billion, or approximately 80%, of the Company's loan portfolio consisted of non-residential real
estate loans. Non-residential real estate loans generally expose a lender to greater risk of non-payment and loss than residential
mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream
of the borrowers. Such loans expose the Company to additional risks because they typically are made on the basis of the
borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by collateral that may
depreciate over time. These loans typically involve larger loan balances to single borrowers or groups of related borrowers
compared to residential mortgage loans. Because such loans generally entail greater risk than residential mortgage loans, the
Company may need to increase its allowance for loan losses in the future to account for the likely increase in probable incurred
credit losses associated with the growth of such loans, which would reduce net income. Also, many of the Company's non-
residential real estate borrowers have more than one loan outstanding. Consequently, an adverse development with respect to one
loan or one credit relationship can expose the Company to a significantly greater risk of loss compared to an adverse development
with respect to a residential mortgage loan.
The Company's allowance for loan losses could become inadequate and reduce earnings and capital.
The Bank maintains an allowance for loan losses that it believes is adequate for absorbing the estimated future losses inherent in
its loan portfolio. Management conducts a periodic review and consideration of the loan portfolio to determine the amount of the
allowance for loan losses based upon general market conditions, credit quality of the loan portfolio and performance of the Bank’s
clients relative to their financial obligations with it. However, the amount of future losses is susceptible to changes in economic
and other market conditions, including changes in interest rates and collateral values, which are beyond the Bank’s control, and
these future losses may exceed its current estimates. Management performs stress tests on the loan portfolios to estimate future
loan losses, but additional provisions for loan losses could be required in the future, including as a result of changes in the
economic assumptions underlying management’s estimates and judgments, adverse developments in the economy on a national
basis or in the Bank’s market area or changes in the circumstances of particular borrowers. The Company cannot predict with
certainty the amount of losses or guarantee that the allowance for loan losses is adequate to absorb future losses in the loan
portfolio. Excessive loan losses could have a material adverse effect on the Company’s financial condition and results of
operations.
The earnings from the Company's investment in ICM will be significantly reduced if ICM is not able to sell
mortgages.
The profitability of ICM depends in large part upon its ability to originate a high volume of loans and to sell them in the
secondary market. Thus, ICM is dependent upon (i) the existence of an active secondary market and (ii) its ability to sell loans
into that market. Volatile interest rate environments could increase this risk initially. However, past performance supports the
Company's ability to fund the increase in ICM's production.
ICM’s ability to readily sell mortgage loans is dependent upon the availability of an active secondary market for single-family
mortgage loans, which in turn depends in part upon the continuation of programs currently offered by Fannie Mae, Freddie Mac
and other institutional and non-institutional investors. These entities account for a substantial portion of the secondary market in
residential mortgage loans. Some of the largest participants in the secondary market, including Fannie Mae and Freddie Mac, are
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government-sponsored enterprises with substantial market influence whose activities are governed by federal law. Any future
changes in laws that significantly affect the activity of these government-sponsored enterprises and other institutional and non-
institutional investors or any impairment of the ICM's ability to participate in such programs could, in turn, adversely affect the
Company's results of operations.
The Company's largest source of revenue (net interest income) is subject to interest rate risk.
The Bank’s financial condition and results of operations are significantly affected by changes in interest rates. The Bank’s
earnings depend primarily upon its net interest income, which is the difference between its interest income earned on its interest-
earning assets, such as loans and investment securities, and its interest expense paid on its interest-bearing liabilities, consisting of
deposits and borrowings. Moreover, the loans included in the Company's interest-earning assets are primarily comprised of
variable and adjustable rate loans. Net interest income is subject to interest rate risk in the following ways:
l In general, for a given change in interest rates, the amount of change in value (positive or negative) is larger for assets and
liabilities with longer remaining maturities. The shape of the yield curve may affect new loan yields, funding costs and
investment income differently.
l The remaining maturity of various assets or liabilities may shorten or lengthen as payment behavior changes in response to
changes in interest rates. For example, if interest rates decline sharply, loans may prepay, or pay down, faster than anticipated,
thus reducing future cash flows and interest income. Conversely, if interest rates increase, depositors may cash in their
certificates of deposit prior to maturity (notwithstanding any applicable early withdrawal penalties) or otherwise reduce their
deposits to pursue higher yielding investment alternatives.
l Re-pricing frequencies and maturity profiles for assets and liabilities may occur at different times. For example, in a falling
rate environment, if assets re-price faster than liabilities, there will be an initial decline in earnings. Moreover, if assets and
liabilities re-price at the same time, they may not be by the same increment. For instance, if the federal funds rate increased 50
basis points, rates on demand deposits may rise by ten basis points; whereas rates on prime-based loans will instantly rise 50
basis points.
Financial instruments do not respond in a parallel fashion to rising or falling interest rates. This causes asymmetry in the
magnitude of changes to net interest income, net economic value and investment income resulting from the hypothetical increases
and decreases in interest rates. Interest rate risk is more fully described in Item 7A – Quantitative and Qualitative Disclosures
About Market Risk included elsewhere in this report.
The Company may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company
has exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the
financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients.
Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the
Company's credit risk may be exacerbated when the collateral held cannot be realized or is liquidated at prices not sufficient to
recover the full amount of the credit or derivative exposure due. Any such losses could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company operates in a highly competitive industry and market area and failure to effectively compete could have
a material adverse effect on its business, financial condition and results of operations.
The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which
are larger and may have more financial resources. Such competitors primarily include national, regional and community banks
within the various markets where the Company operates. The Company also faces competition from many other types of financial
institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance
companies and other financial intermediaries. The financial services industry could become even more competitive as a result of
legislative, regulatory and technological changes and continued consolidation. Also, technology and other changes have lowered
barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks. For example,
consumers can maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds.
Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks.
The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well
as the loss of customer deposits and the related income generated from those deposits. Further, many of the Company's
25
competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many
competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well
as better pricing for those products and services than the Company can.
The Company's ability to compete successfully depends on a number of factors, including, among other things:
l Ability to develop, maintain and build long-term customer relationships based on top quality service, high ethical standards
and safe, sound assets;
l Ability to expand the Company's market position;
l Scope, relevance and pricing of products and services offered to meet customer needs and demands;
l Rate at which the Company introduces new products and services relative to its competitors;
l Customer satisfaction with the Company's level of service; and
l Industry and general economic trends.
Failure to perform in any of these areas could significantly weaken the Company's competitive position, which could adversely
affect its growth and profitability, which, in turn, could have a material adverse effect on its business, financial condition and
results of operations.
The value of the Company's goodwill and other intangible assets may decline in the future.
As of December 31, 2020, the Company had $4.8 million of goodwill and other intangible assets. A significant decline in the
Company's expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant
and sustained decline in the price of its common stock may necessitate taking charges in the future related to the impairment of its
goodwill and other intangible assets. If the Company were to conclude that a future write-down of goodwill and other intangible
assets is necessary, it would record the appropriate charge, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Changes to the London Interbank Offered Rate (“LIBOR”) may adversely impact the value of, and the return on, the
Company's financial instruments that are indexed to LIBOR.
The United Kingdom Financial Conduct Authority, which regulates LIBOR, announced in July 2017 that it will no longer
persuade or compel banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. This
announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. In
November 2020, the LIBOR administrator published a consultation regarding its intention to delay the date on which it will cease
publication of United States dollar LIBOR from December 31, 2021 to June 30, 2023 for the most common tenors of United
States dollar LIBOR, including the three-month LIBOR, but indicated no new contracts using United States dollar LIBOR should
be entered into after December 31, 2021. Publication of non-United States dollar LIBOR would continue to cease after December
31, 2021. Notwithstanding the publication of this consultation, there is no assurance of how long LIBOR of any currency or tenor
will continue to be published. It is impossible to predict whether and to what extent banks will continue to provide LIBOR
submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published before December 31, 2021 or June
30, 2023, as applicable, or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere.
Although the Alternative Reference Rates Committee has announced the Secured Overnight Financing Rate (“SOFR”) as its
recommended alternative to LIBOR, SOFR may not gain market acceptance or be widely used as a benchmark rate. Uncertainty
as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other similar
reforms may adversely affect the value of, and the return on, the Company's financial instruments.
New lines of business or new products and services may subject the Company to additional risks.
The Company is focused on its long-term growth and have undertaken various new business initiatives, many of which involve
activities that are new to it, or in some cases, are in the early stages of development. From time to time, the Company may
develop, grow and/or acquire new lines of business or offer new products and services within existing lines of business. There are
substantial risks and uncertainties associated with these efforts, particularly in instances where the markets for these products and
services are not fully developed.
For example, the Company is involved in new innovative strategies to provide independent banking to corporate clients
throughout the United States by leveraging recent investments in Fintech. The Company also acquired Chartwell in September
2019, which provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk
26
management services that include consulting, outsourcing, testing and training solutions. Given the Company's evolving business
and product diversification, these new initiatives may subject it to, among other risks, increased business, reputational and
operational risk, as well as more complex legal, regulatory and compliance costs and risks. Furthermore, the Bank has several
large depositor relationships that are concentrated in the Fintech industry and the loss of any relationship could force the
Company to fund its business through more expensive and less stable sources. Also, the Bank is engaged in relationships with
clients in the payments, digital savings, cryptocurrency, crowd funding, lottery and gaming industries and any change in
regulations could impact the Company from both an operational and regulatory perspective. As of December 31, 2020, total
gaming deposits represent approximately 18% of the Company's total deposits.
In developing and marketing new lines of business and/or new products and services, the Company may invest significant time
and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services
may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with
regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new
line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a
significant impact on the effectiveness of the Company's system of internal controls. All service offerings, including current
offerings and those which may be provided in the future, may become more risky due to changes in economic, competitive and
market conditions beyond the Company's control. Failure to successfully manage these risks in the development and
implementation of new lines of business or new products or services could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company's investments in Fintech companies and initiatives subject it to material financial, reputational and
strategic risks.
The Company's investments in various Fintech companies have had a significant impact on its results of operations, and it
anticipates they will continue to have a significant impact on its results of operations in the future. Any investments where the
Company has the ability to exercise significant influence, but not control over the operating and financial policies of the investee,
are accounted for using the equity method of accounting. For investments accounted for under the equity method, the Company
increases or decreases its investment by its proportionate share of the investee’s net income or loss. Any investments where the
Company is not able to exercise significant influence over the investee are accounted for under Accounting Standards Update
(“ASU”) 2016-01, where changes in fair value resulting from observable price changes arising from orderly transactions are
recognized in net income. The Company also periodically evaluates its investments for impairment. Please refer to Note 1 –
Summary of Significant Accounting Policies, accompanying the consolidated financial statements included elsewhere in this
report for more information.
Any earnings from the Company's Fintech investments can be volatile and difficult to predict. Furthermore, the Company invests
in many of these Fintech companies for strategic purposes. Where the Company is a minority shareholder, it may be unable to
influence the activities of these organizations, which could have an adverse impact on its ability to execute its strategic initiatives
and successfully develop and implement the banking platform it is developing with these and other partners.
Potential acquisitions may disrupt the Company's business and dilute stockholder value.
The Company generally seeks merger or acquisition partners that are culturally similar, have experienced management and
possess either significant market presence or have potential for improved profitability through financial management, economies
of scale or expanded services. Acquiring other banks, businesses or branches involves various risks commonly associated with
acquisitions, including, among other things:
l Potential exposure to unknown or contingent liabilities of the target company;
l Exposure to potential asset quality issues of the target company;
l Potential disruption to the Company's business;
l Potential diversion of management’s time and attention;
l Possible loss of key employees and customers of the target company;
l Difficulty in estimating the value of the target company; and
l Potential changes in banking or tax laws or regulations that may affect the target company.
Acquisitions typically involve the payment of a premium over book and market values, and therefore, some dilution of the
Company's tangible book value and net income per common share may occur in connection with any future transaction.
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Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence and/or
other projected benefits from an acquisition could have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company is subject to liquidity risk, which could disrupt the ability to meet its financial obligations.
Liquidity refers to the ability of the Company to ensure sufficient levels of cash to fund operations, such as meeting deposit
withdrawals, funding loan commitments, paying expenses and meeting periodic payment obligations under certain subordinated
debentures issued by the Company in connection with the issuance of floating rate redeemable trust preferred securities. The
source of the funds for the Company’s debt obligations is dependent on the Bank.
Any significant restriction or disruption of the Company’s ability to obtain funding from these or other sources could have a
negative effect on the Company’s ability to satisfy its current and future financial obligations, which could materially affect the
Company’s financial condition.
Limited availability of borrowings and liquidity from the FHLB system and other sources could negatively impact
earnings.
The Bank is currently a member bank of the FHLB of Pittsburgh. Membership in this system of quasi-governmental, regional
home loan oriented agency banks allows it to participate in various programs offered by the FHLB. The Bank borrows funds from
the FHLB, which are secured by a blanket lien on certain residential and commercial mortgage loans, and if applicable,
investment securities with collateral values in excess of the outstanding balances. Current and future earnings shortfalls and
minimum capital requirements of the FHLB may impact the collateral necessary to secure borrowings and limit the borrowings
extended to their member banks, as well as require additional capital contributions by member banks. Should this occur, the
Bank's short-term liquidity needs could be negatively impacted. If the Bank were restricted from using FHLB advances due to
weakness in the system or with the FHLB of Pittsburgh, it may be forced to find alternative funding sources. If the Bank is
required to rely more heavily on higher cost funding sources, revenues may not increase proportionately to cover these costs,
which would adversely affect results of operations and financial position.
Interruption to the Company's information systems or breaches in security, including as a result of cyberattacks or
other cyber incidents, could adversely affect the its operations or otherwise harm its business.
The Company relies on information systems and communications for operating and monitoring all major aspects of business, as
well as internal management functions. Any failure, interruption, intrusion or breach in security of these systems could result in
failures or disruptions in the customer relationship, management, general ledger, deposit, loan and other systems.
There have been several cyberattacks on websites of large financial services companies. Even if not directed at the Company
specifically, attacks on other entities with whom it does business, or on whom it otherwise relies, or attacks on financial or other
institutions important to the overall functioning of the financial system could adversely affect, directly or indirectly, aspects of the
Company's business.
Cyberattacks on third-party retailers or other business establishments that widely accept debit card or check payments could
compromise sensitive Bank customer information, such as debit card and account numbers. Such an attack could result in
significant costs to the Bank, such as costs to reimburse customers, reissue debit cards and open new customer accounts.
In addition, there have been efforts on the part of third parties to breach data security at financial institutions, including through
the use of social engineering schemes such as “phishing.” The ability of customers to bank remotely, including online and through
mobile devices, requires secure transmission of confidential information and increases the risk of data security breaches. Because
the techniques used to attack financial services company communications and information systems change frequently (and
generally increase in sophistication), attacks are often not recognized until launched against a target and the Company may be
unable to address these techniques in advance of attacks, including by implementing adequate preventative measures. The
Company may also be unable to prevent attacks that are supported by foreign governments or other well-financed entities and that
may originate from less regulated and remote areas of the world.
The occurrence of any such failure, disruption or security breach of the Company's information systems, particularly if
widespread or resulting in financial losses to the Company's customers, could damage its reputation and its relationships with its
partners and customers, result in a loss of customer business, subject the Company to additional regulatory scrutiny and expose it
to civil litigation and possible financial liability. These risks could have a material effect on the Company's business, results of
28
operations and financial condition.
The Company continually encounters technological change and failure to continually adapt to such change could
materially impact its financial condition and results of operations.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. The Company's future success depends, in part, upon its ability to address the needs of
customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional
efficiencies in operations. Many of the Company's competitors have substantially greater resources to invest in technological
improvements. The Company may not be able to effectively implement new technology-driven products and services or be
successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change
affecting the financial services industry could have a material adverse effect on the Company's business, financial condition and
results of operations.
Consumers may decide not to use banks to complete their financial transactions, or deposit funds electronically with
banks having no branches within the Company's market area, which could affect net income.
Technology and other changes allow parties to complete financial transactions without banks. For example, consumers can pay
bills and transfer funds directly without banks. Consumers can also shop for higher deposit interest rates at banks across the
country, which may offer higher rates because they have few or no physical branches and open deposit accounts electronically.
This process could result in the loss of fee income, as well as the loss of client deposits and the income generated from those
deposits, in addition to increasing funding costs.
The Company's operations rely on certain external vendors who may not perform in a satisfactory manner.
The Company is reliant upon certain external vendors to provide products and services necessary to maintain its day-to-day
operations. Accordingly, its operations are exposed to risk that these vendors will not perform in accordance with applicable
contractual arrangements or service level agreements. The Company maintains a system of policies and procedures designed to
monitor vendor risks including, among other things, (i) changes in the vendor’s organizational structure; (ii) changes in the
vendor’s financial condition; and (iii) changes in the vendor’s support for existing products and services. The failure of an
external vendor to perform in accordance with applicable contractual arrangements or the service level agreements could be
disruptive to operations, which could have a material adverse impact on the Company's business, financial condition and results of
operations.
The Company is subject to environmental liability risk associated with lending activities.
A significant portion of the Company's loan portfolio is secured by real property. During the ordinary course of business, the
Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic
substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for
remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur
substantial expenses and may materially reduce the affected property’s value or limit its ability to use or sell the affected property.
In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase
exposure to environmental liability. Environmental reviews of real property before initiating foreclosure actions may not be
sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on the Company's business, financial condition and results of
operations.
Financial services companies depend on the accuracy and completeness of information about customers and
counterparties which, if inaccurate, could have a material adverse impact on the Company's financial condition and
results of operations.
In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on
behalf of customers and counterparties, including financial statements, credit reports and other financial information. The
Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors,
as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports
or other financial information could have a material adverse impact on the Company's business, financial condition and results of
operations.
29
The Company is at risk for an adverse impact on business due to damage to its reputation.
Our ability to compete effectively, to attract and retain customers and employees, and to grow our business is dependent on
maintaining our reputation and having the trust of our customers and employees. Many types of developments, if publicized, can
negatively impact a company’s reputation with adverse consequences to its business.
To an increasing extent, financial services companies, including the Company, may face criticism for engaging in business with
specific customers or with customers in particular industries, where the customers’ activities, even if legal, are perceived as
having harmful impacts on matters such as environment, consumer health and safety or society at large. Criticism can come in
many forms, including for providing banking services to companies engaged in, for example, the gaming industry or
cryptocurrency. Many of these issues are divisive without broad agreement as to the appropriate steps a company should take and
often with strong feelings on both sides. As a result, however we respond to such criticism, we expose ourselves to the risks that
current or potential customers decline to do business with us or current or potential employees refuse to work for us. This can be
true regardless of whether we are perceived by some as not having done enough to address concerns or by others as having
inappropriately yielded to pressures. This pressure can also be a factor in decisions as to which business opportunities and
customers we pursue, potentially resulting in foregone profit opportunities.
The Company may also face criticism in response to changes in overall strategic direction, the addition of new lines of business,
the exit of current lines of business or with openings or closures of certain banking centers.
Risks Related to the Legal and Regulatory Environment
Changes in tax law may adversely affect the Company's performance and create the risk that it may need to adjust its
accounting for these changes.
The Company is subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise,
withholding and ad valorem taxes. Changes to the Company's taxes could have a material adverse effect on its performance. In
addition, customers are subject to a wide variety of federal, state and local taxes. Changes in taxes paid by customers may
adversely affect their ability to purchase homes or consumer products, which could adversely affect their demand for loans and
deposit products. In addition, such negative effects on customers could result in defaults on the loans and decrease the value of
mortgage-backed securities in which the Company has invested.
The Company is subject to extensive government regulation and supervision and possible enforcement and other legal
actions that could detrimentally affect its business.
The Company, primarily through the Bank and certain non-bank subsidiaries, are subject to extensive federal and state regulation
and supervision, which vests a significant amount of discretion in the various regulatory authorities. Banking regulations are
primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security
holders. These regulations and supervisory guidance affect the Company's lending practices, capital structure, investment
practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking
laws, regulations and policies for possible changes. The Dodd-Frank Act instituted major changes to the banking and financial
institutions regulatory regimes. Other changes to statutes, regulations or regulatory policies or supervisory guidance, including
changes in interpretation or implementation of statutes, regulations, policies or supervisory guidance, could affect the Company in
substantial and unpredictable ways. Such changes could subject it to additional costs, limit the types of financial services and
products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products,
among other things. Failure to comply with laws, regulations, policies or supervisory guidance could result in enforcement and
other legal actions by Federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, the
revocation of a banking charter, other sanctions by regulatory agencies, civil money penalties and/or reputational damage. In this
regard, government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect
to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived
compliance failures. Any of the foregoing could have a material adverse effect on the Company's business, financial condition and
results of operations.
For further detail, please refer to the sections captioned Supervision and Regulation included in Item 1 – Business and Note 15 –
Regulatory Capital Requirements accompanying the consolidated financial statements included elsewhere in this report.
30
Failure to meet any of the various capital adequacy guidelines which the Company is subject to could adversely affect
its operations and could compromise its status as a financial holding company.
The Company and the Bank are required to meet certain regulatory capital adequacy guidelines and other regulatory requirements
imposed by the Federal Reserve Board, the FDIC and the United States Department of Treasury. If the Company or the Bank fails
to meet these minimum capital guidelines and other regulatory requirements, the Company's financial condition and results of
operations would be materially and adversely affected and could compromise its status as a financial holding company. Please
refer to the sections captioned Supervision and Regulation – Capital Requirements included in Item 1 – Business and Note 15 –
Regulatory Capital Requirements accompanying the consolidated financial statements included elsewhere in this report, for
detailed capital guidelines for bank holding companies and banks.
The Company is a financial holding company and its sources of funds are limited.
The Company is a financial holding company and its operations are primarily conducted by the Bank, which is subject to
significant federal and state regulation. Cash available to pay dividends to shareholders of the Company is derived primarily from
dividends paid by the Bank. As a result, the Company’s ability to receive dividends or loans from its Bank subsidiary is restricted.
Under federal law, the payment of dividends by the Bank is subject to capital adequacy requirements. The Federal Reserve Board
and/or the FDIC prohibit a dividend payment by the Company or the Bank that would constitute an unsafe or unsound practice.
Please refer to the sections captioned Supervision and Regulation – Limit on Dividends included in Item 1 – Business and Note 15
– Regulatory Capital Requirements accompanying the consolidated financial statements included elsewhere in this report.
The inability of the Bank to generate profits and pay such dividends to the Company, or regulator restrictions on the payment of
such dividends to the Company even if earned, would have an adverse effect on the financial condition and results of operations
of the Company and the Company’s ability to pay dividends to its shareholders.
In addition, since the Company is a legal entity separate and distinct from the Bank, its right to participate in the distribution of
assets of the Bank upon the Bank’s liquidation, reorganization or otherwise will be subject to the prior claims of the Bank’s
creditors, which will generally take priority over the Bank’s shareholders.
Risks Associated With the Company's Common Stock
The trading volume in the Company's common stock is less than that of other larger financial services companies.
Shares of the Company's common stock began trading on the Nasdaq Capital Market in December 2017 under the symbol
“MVBF” and were previously traded on the OTC Bulletin Board. There has been limited trading in its shares over the last 12
months. If limited trading in the Company's common stock continues, it may be difficult for investors to sell such shares in the
public market at any given time at prevailing prices. Also, the sale of a large block of the Company's common stock could depress
the market price of the common stock to a greater degree than a company that typically has a higher volume of trading of its
securities.
If the Company is unable to maintain compliance with Nasdaq listing requirements, its stock could be delisted, and
the trading price, volume and marketability of the stock could be adversely affected.
There can be no assurances that the Company will be able to maintain compliance with Nasdaq’s present listing standards, or that
Nasdaq will not implement additional listing standards with which it will be unable to comply. Failure to maintain compliance
with Nasdaq listing requirements could result in the delisting of the Company's shares from trading on the Nasdaq system, which
could have a material adverse effect on the trading price, volume and marketability of the common stock.
The Company's stock price can be volatile.
Stock price volatility may make it more difficult for shareholders to resell their common stock when they want and at prices they
find attractive. The Company's stock price can fluctuate significantly in response to a variety of factors including, among other
things:
l actual or anticipated variations in quarterly results of operations;
l recommendations by securities analysts;
l operating and stock price performance of other companies that investors deem comparable to the Company;
31
l news reports relating to trends, concerns and other issues in the financial services industry;
l perceptions in the marketplace regarding the Company and/or its competitors;
l new technology used, or services offered, by competitors;
l significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or
involving the Company or its competitors;
l failure to integrate acquisitions or realize anticipated benefits from acquisitions;
l changes in government regulations; and
l geopolitical conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, including real or anticipated changes in the strength of the economies the Company serves; industry
factors and general economic and political conditions and events, such as economic slowdowns or recessions; interest rate
changes, crude oil price volatility or credit loss trends could also cause the Company's stock price to decrease, regardless of
operating results.
The Company's ability to pay dividends is not certain and it may be unable to pay future dividends. As a result, capital
appreciation, if any, of The Company's common stock may be shareholders' sole opportunity for gains on their
investment for the foreseeable future.
The Company's ability to pay dividends in the future is not certain. Any future determination relating to dividend policy will be
made at the discretion of its Board of Directors and will depend on a number of factors, including future earnings, capital
requirements, financial condition, future prospects, regulatory restrictions and other factors that its Board of Directors may deem
relevant. The holders of the Company's common stock are entitled to receive dividends when, and if declared by its Board of
Directors out of funds legally available for that purpose. As part of its consideration of whether to pay cash dividends, the
Company intends to retain adequate funds from future earnings to support the development and growth of its business. In
addition, the Company's ability to pay dividends is restricted by federal policies and regulations and by the terms of its existing
indebtedness. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common
stock only out of net income available over the past year and only if prospective earnings retention is consistent with the
organization’s expected future needs and financial condition. For further information, please refer to the section captioned
Supervision and Regulation – Limit on Dividends in Item 1 – Business included elsewhere in this report.
General Risk Factors
The Company is exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley
Act of 2002.
The Company is required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. At December 31, 2020, the Company
has no material weaknesses in its internal control over financial reporting; however, a material weakness could occur in the future.
A “material weakness” is a control deficiency, or combination of significant deficiencies that results in more than a remote
likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. If the
Company fails to maintain a system of internal control over financial reporting that meets the requirements of Section 404, it may
be subject to sanctions or investigation by regulatory authorities. Additionally, failure to comply with Section 404 or the report by
the Company of a material weakness may cause investors to lose confidence in its financial statements and its stock price may be
adversely affected. If the Company fails to remedy any material weakness, its financial statements may be inaccurate, it may not
have access to the capital markets, and its stock price may be adversely affected.
The value of the securities in the Company's investment securities portfolio may be negatively affected by disruptions
in securities markets.
Due to credit and liquidity risks and economic volatility, making the determination of the value of a securities portfolio is less
certain. A decline in market value associated with these disruptions could result in other-than-temporary or permanent
impairments of these assets, which would lead to accounting charges which could have a material negative effect on the
Company's financial condition and results of operations.
The Company's accounting policies and estimates are critical to how it reports its financial condition and results of
operations, and any changes to such accounting policies and estimates could materially affect how the Company
32
reports its financial condition and results of operations.
Accounting policies and estimates are fundamental to how the Company records and reports its financial condition and results of
operations. The Company's management makes judgments and assumptions in selecting and adopting various accounting policies
and in applying estimates so that such policies and estimates comply with accounting principles generally accepted in the United
States of America (“U.S. GAAP”).
Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain
the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is
obtained either when earning income, recognizing an expense, recovering an asset, valuing an asset or liability or reducing a
liability. Because of the uncertainty surrounding management's judgments and the estimates pertaining to these matters, actual
outcomes may be materially different from amounts previously estimated. For example, because of the inherent uncertainty of
estimates, the Bank could need to significantly increase its allowance for loan losses if actual losses are more than the amount
reserved. Any increase in its allowance for loan losses or loan charge-offs could have a material adverse effect on the Company's
financial condition and results of operations. In addition, the Company cannot guarantee that it will not be required to adjust
accounting policies or restate prior financial statements. Please refer to the section captioned Allowance for Loan Losses in Item 7
– Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report for
further discussion related to the Company's process for determining the appropriate level of the allowance for loan losses.
Further, from time to time, the FASB and SEC change the financial accounting and reporting standards that govern the
preparation of the Company's financial statements. Recent economic conditions have resulted in continuing scrutiny of accounting
standards by legislators and regulators, particularly as they relate to fair value accounting principles. In addition, ongoing efforts
to achieve convergence between U.S. GAAP and International Financial Reporting Standards may result in changes to U.S.
GAAP. These changes can be hard to predict and can materially impact how the Company records and reports its financial
condition and results of operations. In some cases, the Company could be required to apply a new or revised standard
retroactively, resulting in it restating prior period financial statements or otherwise adversely affecting its financial condition or
results of operations.
The Company's accounting estimates and risk management processes rely on analytical and forecasting models which
may prove to be inadequate or inaccurate which could result in unexpected losses, insufficient allowances for loan
losses, or unexpected fluctuations in the value of its financial instruments.
The processes the Company uses to estimate its inherent loan losses and to measure the fair value of financial instruments, as well
as the processes used to estimate the effects of changing interest rates and other market measures on its financial condition and
results of operations, depends upon the use of analytical and forecasting models. These models reflect assumptions that may not
be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the
models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models
used for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses
upon changes in market interest rates or other market measures. If the models the Company uses for determining its probable loan
losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs. If the models used to
measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate
unexpectedly or may not accurately reflect what the Company could realize upon sale or settlement of such financial instruments.
Any such failure in the Company's analytical or forecasting models could have a material adverse effect on its business, financial
condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company, through the Bank, owns its main office located at 301 Virginia Avenue in Fairmont, WV. The Company’s
subsidiaries own or lease various other offices in the counties and cities in which they operate. As of December 31, 2020, the
Company operated 13 full-service banking branches, including three full service banking branches acquired from First State in
April 2020, in the locations further described in Item 1 – Business included elsewhere in this report. Seven of the 13 full-service
banking branches are owned and the remaining six are leased.
In January 2020, the Company closed one branch location in Morgantown, WV. In April 2020, the Company sold three Bank
33
branch locations in Berkeley County, WV, and one Bank branch location in Jefferson County, WV, pursuant to a Purchase and
Assumption Agreement with Summit.
No one facility is material to the Company. Management believes that the facilities are generally in good condition and suitable
for the operations for which they are used.
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, the Company and its subsidiaries may be subject to claims, asserted or
unasserted or named as a party to lawsuits or investigations. Litigation, in general, and intellectual property and securities
litigation, in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings
cannot be predicted with any certainty, and in the case of more complex legal proceedings, the results can be difficult to predict.
The Company is not aware of any material pending legal proceedings to which the Company or any of its subsidiaries is a party or
of which any of their property is the subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
34
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded on the Nasdaq Capital Market under the symbol “MVBF.”
As of March 8, 2021, MVB Financial Corp. had approximately 920 stockholders of record.
In 2020 2019 and 2018, the Company paid dividends totaling $0.36, $0.195 and $0.11, respectively, per share and currently
expects that comparable dividends will continue to be paid in the future.
The following five-year performance graph compares the cumulative total shareholder return (assuming reinvestment of
dividends) on the Company’s common stock to the KBW Bank Index and the Russell 2000 Index. The stock performance graph
assumes $100 was invested on December 31, 2015, and the cumulative return is measured as of each subsequent fiscal year end.
Total Return Performance
$200
$175
e
u
l
a
V
x
e
d
n
I
$150
$125
$100
$75
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
Period Ending
MVB Financial Corp.
KBW Bank Index
Russell 2000
Index
MVB Financial Corp.
KBW Bank Index
Russell 2000
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
$
100.00 $
100.00
100.00
98.32 $
125.60
119.48
154.81 $
146.02
135.18
139.92 $
117.39
118.72
193.93 $
155.12
146.89
179.58
133.98
173.86
Equity Compensation Plan Information
Information about the Company’s equity compensation plan is disclosed below under Item 12, Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters, in Part III of this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
In April 2020, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin. The purchase price of the
35
transaction consisted of 19,278 unregistered shares of MVB common stock and an undisclosed amount of cash.
Purchases of Equity Securities by Issuer and Affiliated Purchasers
Details of the repurchases of the common stock during the three months ended December 31, 2020, are included in the following
table:
Period
October 1 - October 31, 2020
November 1 - November 30, 2020
December 1 - December 31, 2020
Total
Total number
of shares
purchased
Average price
paid per share
130,400 $
1,500 $
536,490 $
668,390
17.00
16.37
20.25
Total number of shares
purchased as part of
publicly announced
plans or programs
Maximum number (or
approximate dollar value) of
shares (or units) that may yet be
purchased under the plans or
programs
130,400 $
1,500 $
536,490 $
668,390
1,582,679
1,558,121
31,866,000
Please refer to Note 13 – Stock Offerings accompanying the consolidated financial statements included elsewhere in this report.
36
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated summary sets forth the Company’s selected financial data that has been derived from its audited
consolidated financial statements for each of the periods and at the dates indicated.
(Dollars in thousands except per share data)
Balance Sheet Data:
Assets
Investment securities
Loans receivable, net
Loans held-for-sale
Deposits
Subordinated debt
Stockholders’ equity
Weighted-average shares outstanding - basic
Weighted-average shares outstanding - diluted
Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for loan loss
Net interest income after provision for loan loss
Noninterest income
Noninterest expense
Income from continuing operations, before income taxes
Income tax expense - continuing operations
Net income from continuing operations
Net income from discontinued operations
Net income
Preferred dividends
Net income available to common shareholders
Per Share Data:
Earnings per share from continuing operations - basic
Earnings per share from discontinued operations - basic
Earnings per share per common share - basic
Earnings per share from continuing operations - diluted
Earnings per share from discontinued operations - diluted
Earnings per share per common share - diluted
Cash dividends
Book value
Tangible book value 1
Asset Quality Ratios:
Nonperforming loans to total loans
Nonperforming assets to total assets
Net charge-offs to total loans
Allowance for loan losses to total loans
Selected Ratios:
2020
$ 2,331,476
438,209
1,427,900
1,062
1,982,389
43,407
239,483
11,821,574
12,088,106
Years Ended December 31,
2018
2017
2019
$ 1,944,114
254,335
1,362,766
109,788
1,265,042
4,124
211,936
11,713,885
12,044,667
$ 1,750,969
231,213
1,293,427
75,807
1,309,154
17,524
176,773
11,030,984
12,722,003
$ 1,534,302
231,507
1,096,063
66,794
1,159,580
33,524
150,192
10,308,738
10,440,228
2016
$ 1,418,804
162,368
1,043,764
90,174
1,107,017
33,524
145,625
8,212,021
10,068,733
$
$
$
$
$
$
$
$
80,453
11,627
68,826
16,579
52,247
91,837
97,141
46,943
9,532
37,411
—
37,411
461
36,950
3.13
—
3.13
3.06
—
3.06
0.36
20.14
19.73
82,361
22,961
59,400
1,789
57,611
64,604
87,201
35,014
8,450
26,564
427
26,991
479
26,512
2.22
0.04
2.26
2.16
0.04
2.20
0.195
17.13
15.20
$
$
69,760
17,706
52,054
2,440
49,614
38,640
72,878
15,376
3,373
12,003
—
12,003
489
11,514
1.04
—
1.04
1.00
—
1.00
0.11
14.55
12.92
56,598
12,301
44,297
2,173
42,124
40,706
70,500
12,330
4,755
7,575
—
7,575
498
7,077
0.69
—
0.69
0.68
—
0.68
0.10
13.63
11.80
54,123
11,132
42,991
3,632
39,359
43,205
69,209
13,355
4,378
8,977
3,935
12,912
1,128
11,784
0.96
0.48
1.44
0.92
0.39
1.31
0.08
12.93
11.01
0.9 %
0.8
0.1
1.8
0.4 %
0.3
0.1
0.9
0.5 %
0.5
0.1
0.8
0.9 %
0.7
0.1
0.9
0.6 %
0.5
0.2
0.9
Return on average assets - continuing operations
Return on average equity - continuing operations
Dividend payout
Efficiency
Equity to assets
Bank common equity tier 1 capital
Bank tier 1 risk-based capital
Bank total risk-based capital
Bank leverage
1.7 %
16.7
11.4
60.5
10.3
14.6
14.6
15.8
11.0
1.4 %
13.6
8.5
70.3
10.9
12.1
12.1
12.9
9.9
0.7 %
7.5
10.2
80.4
10.1
12.5
12.5
13.3
10.2
0.5 %
5.2
13.6
82.9
9.8
13.3
13.3
14.2
10.7
0.6 %
7.3
5.0
80.3
10.3
13.6
13.6
14.5
10.9
1 This is a non-U.S. GAAP measure that the Company believes is helpful to interpreting financial results. For a reconciliation to
the most directly comparable U.S. GAAP financial measure, please refer to the “Non-U.S. GAAP Financial Measure
Reconciliation” below.
37
(Dollars and shares in thousands, except per share data)
2020
2019
2018
2017
2016
Non-U.S. GAAP Financial Measure Reconciliation
Years Ended/As of December 31,
Goodwill
Intangibles
Total intangibles
Total Equity
Less: Preferred equity
Less: Total intangibles
Tangible common equity
$
2,350 $
19,630 $
18,480 $
18,480 $
2,400
4,750
3,473
23,103
550
19,030
646
19,126
18,480
744
19,224
$
239,483 $
211,936 $
176,773 $
150,192 $
145,625
(7,334)
(4,750)
227,399
(7,334)
(23,103)
181,499
(7,834)
(19,030)
149,909
(7,834)
(19,126)
123,232
(16,334)
(19,224)
110,067
Tangible common equity
Common shares outstanding
Tangible book value per common share
$
$
227,399 $
181,499 $
149,909 $
123,232 $
110,067
11,526
11,944
11,607
10,445
19.73 $
15.20 $
12.92 $
11.80 $
9,997
11.01
38
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and
related notes thereto included elsewhere in this report. A discussion of changes in the Company's results of operations from 2018
to 2019 has been omitted from this report, but may be found in Item 7 – Management's Discussion and Analysis of Financial
Condition and Results of Operations, of its Annual Report on Form 10-K for the year ended December 31, 2019, filed with the
SEC on March 13, 2020. Further, the Company encourages you to revisit the Forward-Looking Statements at the beginning of this
report.
Executive Summary
Financial Results
Total assets increased $387.4 million to $2.33 billion at December 31, 2020 from $1.94 billion at December 31, 2019. Earning
assets increased $388.8 million to $2.15 billion at December 31, 2020 from $1.76 billion at December 31, 2019. This increase of
$388.8 million in earning assets was primarily driven by the $235.2 million increase in interest-bearing deposits with other banks
due to increased deposit growth. Deposits increased $717.3 million to $1.98 billion at December 31, 2020, from $1.27 billion at
December 31, 2019. The overall cost of interest-bearing liabilities for the Company was 0.85% in 2020 compared to 1.68% in
2019. This cost of interest-bearing liabilities, combined with the earning asset yield, resulted in a net interest margin (tax-
equivalent) of 3.57% in 2020 compared to 3.53% in 2019.
Net interest income increased $9.4 million, noninterest income increased $27.2 million and noninterest expenses increased by
$9.9 million during 2020 compared to 2019. The Company’s yield on earning assets (tax-equivalent) in 2020 was 4.17%
compared to 4.87% in 2019. Total loans increased by $79.2 million to $1.45 billion at December 31, 2020.
The Company earned $37.4 million in 2020 compared to $27.0 million in 2019, an increase of $10.4 million. The 2020 earnings
equated to a return on average assets of 1.7% and a return on average equity of 16.7%, compared to 2019 results of 1.4% and
13.6%, respectively. Basic earnings per share were $3.13 in 2020 compared to $2.26 in 2019. Diluted earnings per share were
$3.06 in 2020 compared to $2.20 in 2019.
COVID-19 Pandemic
The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy, as well as
financial markets. The full impact of COVID-19 is unknown and continues to evolve. Financial markets adjusted dramatically to
the reduced economic activity and the pace of recovery is uncertain. The financial market benchmark most relevant to the
Company’s current and future profitability is the United States Government Treasury yield curve. The United States Government
Treasury yield curve is used as a basis for the pricing of most bonds, loans, borrowings, deposits and other fixed income yield
curves. The United States Government Treasury yield curve has experienced a large, relatively parallel, downward shift. Given
the Company’s asset-sensitive position, management expects that net interest income will decline. As the outlook for the
COVID-19 pandemic improves, management expects that the United States Government Treasury curve will experience some
degree of an upward shift over time.
Management expects that some clients will be unable to meet their financial obligations in the near-term as a result of the
decreased economic activity brought on by the COVID-19 pandemic. However, management does not expect that these credit
concerns will perpetuate indefinitely. Many clients may be eligible to defer loan payments to a later date. The Company actively
participated in the PPP, is evaluating other programs available to assist its clients and is providing consumer deferrals consistent
with government-sponsored enterprise (“GSE”) guidelines. Management is working to incorporate scenarios that reflect decreased
loan cash flows in the short term into the Company’s interest rate risk models.
There was considerable demand for the PPP implemented by the CARES Act to combat the economic slowdown brought on by
the COVID-19 pandemic. The PPP was created to provide funding to small business owners who may have had to temporarily
close or scale back production as a result of the COVID-19 pandemic. The intended use of this funding is to pay employees who
may be temporarily unable to work. The original tranche of PPP funding of $349 billion ran out 13 days after the program's
implementation. The second tranche of PPP funding of $310 billion had funds available as of the program's closure date. On July
2, 2020, additional legislation was passed that allowed small businesses to apply for loans through August 8, 2020. On January 8,
2021, the SBA announced that the PPP program would reopen on January 11, 2021 for new borrowers and certain existing PPP
39
borrowers. During the latest round, funds totaling $284 billion were authorized through March 31, 2021.
As of December 31, 2020, commercial loans totaling $34.7 million and mortgage loans totaling $13.5 million were approved for
modifications, such as interest-only payments and payment deferrals. These modifications were not considered to be troubled debt
restructurings in reliance on guidance issued by banking regulators titled the “Interagency Statement on Loan Modifications and
Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” The Company originated 455 PPP
loans with original balances of $92.8 million and outstanding balances of $82.0 million as of December 31, 2020 are included on
the Company's balance sheet.
Net Interest Income and Net Interest Margin (Average Balance Schedules)
The following tables present, for the periods indicated, information about (1) average balances, the total dollar amount of interest
income from interest earning assets and the resultant average yields; (2) average balances, the total dollar amount of interest
expense on interest-bearing liabilities and the resultant average rates; (3) the interest rate spread; (4) net interest income and
margin; and (5) net interest income and margin (on a tax-equivalent basis). The average balances presented are derived from daily
average balances.
40
Average Balances and Analysis of Net Interest Income
2020
Interest
Income/
Expense
Average
Balance
Yield/
Cost
Average
Balance
2019
Interest
Income/
Expense
Yield/
Cost
Average
Balance
2018
Interest
Income/
Expense
Yield/
Cost
$ 125,259 $
12,484
191
246
0.15 % $
9,264 $
1.97
14,097
209
280
2.26 % $
5,176 $
1.99
14,778
108
295
2.09 %
2.00
121,607
144,389
2,448
2.01
5,361
3.71
129,486
103,235
3,055
2.36
4,456
4.32
150,134
79,161
3,580
2.38
3,557
4.49
1,136,858
54,434
4.79
987,674
53,087
5.37
854,108
43,099
5.05
8,966
422
4.70
12,549
561
4.47
14,352
632
4.40
403,166
18,100
4.49
447,891
21,220
4.74
395,302
18,794
4.75
6,973
465
6.67
8,948
547
6.11
11,349
575
5.07
1,555,963
73,421
4.72
1,457,062
75,415
5.18
1,275,111
63,100
4.95
1,959,702
81,667
4.17
1,713,144
83,415
4.87
1,524,360
70,640
4.63
(18,079)
26,460
181,439
$ 2,149,522
(11,318)
17,625
131,370
$ 1,850,821
(10,530)
16,828
106,600
$ 1,637,258
(Dollars in thousands)
Assets
Interest-bearing deposits in banks
CDs with banks
Investment securities:
Taxable
Tax-exempt 2
Loans and loans held-for-sale: 1 3
Commercial
Tax-exempt 2
Real estate
Consumer
Total loans
Total earning assets
Less: Allowance for loan losses
Cash and due from banks
Other assets
Total assets
Liabilities
Deposits:
Negotiable order of withdrawal
$ 408,110 $
2,521
0.62
$ 381,092 $
3,586
0.94
$ 432,789 $
3,246
0.75
Money market checking
458,606
2,680
0.58
331,636
5,144
1.55
245,008
2,455
1.00
Savings
IRAs
CDs
Repurchase agreements and federal funds sold
FHLB and other borrowings
Subordinated debt
45,420
13,691
6
0.01
218
1.59
349,787
4,869
1.39
9,856
68,407
7,568
23
0.23
1,049
1.53
261
3.45
38,324
17,415
387,660
11,252
183,812
12,124
4
0.01
329
1.89
8,376
2.16
48
0.43
4,704
2.56
770
6.35
44,049
17,894
319,720
18,536
190,686
25,774
29
0.07
285
1.59
5,620
1.76
56
0.30
4,259
2.23
1,756
6.81
Total interest-bearing liabilities
1,361,445
11,627
0.85
1,363,315
22,961
1.68
1,294,456
17,706
1.37
Noninterest-bearing demand deposits
Other liabilities
Total liabilities
502,457
61,169
1,925,071
Stockholders’ equity
Preferred stock
Common stock
Additional paid-in capital
Treasury stock
Retained earnings
Accumulated other comprehensive income (loss)
7,334
12,047
130,314
(2,638)
77,043
351
Total stockholders’ equity
Total liabilities and stockholders’ equity
224,451
$ 2,149,522
258,546
33,810
1,655,671
7,660
11,762
118,837
(1,084)
61,712
(3,737)
195,150
$ 1,850,821
171,631
10,304
1,476,391
7,834
11,082
107,669
(1,084)
42,509
(7,143)
160,867
$ 1,637,258
Net interest spread (tax-equivalent)
Net interest income and margin (tax-equivalent) 2
Less: Tax-equivalent adjustments
Net interest spread
$ 70,040
(1,214)
3.32
3.57 %
3.25
$ 60,454
(1,054)
3.19
3.53 %
3.13
$ 52,934
(880)
3.26
3.47 %
3.21
Net interest income and margin
$ 59,400
1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.
2 In order to make pre-tax income and resultant yields on tax-exempt loans and investment securities comparable to those on taxable loans and investment
securities, a tax-equivalent adjustment has been computed using a Federal tax rate of 21% for the twelve months ended December 31, 2020, 2019 and 2018, which
is a non-U.S. GAAP financial measure. Please refer to the reconciliation of this non-U.S. GAAP financial measure to its most directly comparable U.S. GAAP
financial measure following this table.
3 The Company’s PPP loans, totaling $82.0 million at December 31, 2020, are included in this amount for the twelve months ended December 31, 2020.
$ 68,826
$ 52,054
3.51 %
3.47 %
3.41 %
41
(Dollars in thousands)
Net interest margin - U.S. GAAP basis
Net interest income
Average interest-earning assets
Net interest margin
Net interest margin - non-U.S. GAAP basis
Net interest income
Plus: Impact of fully tax-equivalent adjustment
Net interest income on a fully-tax equivalent basis
Average interest-earning assets
$
$
$
Year Ended December 31,
2020
2019
2018
68,826
$
59,400
$
1,959,702
3.51 %
1,713,144
3.47 %
52,054
1,524,360
3.41 %
68,826
$
59,400
$
1,214
70,040
1,054
60,454
52,054
880
52,934
1,959,702
$
1,713,144
$
1,524,360
Net interest margin on a fully tax-equivalent basis
3.57 %
3.53 %
3.47 %
Rate Volume Calculation
The year over year change in rate volume to 2020 from 2019 is as follows:
(Dollars in thousands)
Earning Assets
Loans
Commercial
Tax-exempt
Real estate
Consumer
Investment securities:
Taxable
Tax-exempt
Interest-bearing deposits in banks
CDs with banks
Total earning assets
Interest-bearing liabilities
Negotiable order of withdrawal
Money market checking
Savings
IRAs
CDs
Repurchase agreements and federal funds sold
FHLB and other borrowings
Subordinated debt
Total interest-bearing liabilities
Total
Net Interest Income
Change in
Volume
Change in Rate
Change in Both
Rate & Volume
Total Change
$
$
$
$
$
8,018 $
(160)
(2,119)
(121)
(186)
1,776
2,617
(32)
9,793 $
254 $
1,969
1
(70)
(818)
(6)
(2,954)
(289)
(1,913) $
11,706 $
(5,796) $
29
(1,112)
50
(448)
(623)
(195)
(2)
(8,097) $
(1,232) $
(3,206)
1
(52)
(2,980)
(22)
(1,885)
(352)
(9,728) $
1,631 $
(875) $
(8)
111
(11)
27
(248)
(2,440)
—
(3,444) $
(87) $
(1,227)
—
11
291
3
1,184
132
307 $
(3,751) $
1,347
(139)
(3,120)
(82)
(607)
905
(18)
(34)
(1,748)
(1,065)
(2,464)
2
(111)
(3,507)
(25)
(3,655)
(509)
(11,334)
9,586
Net interest income is the amount by which interest income on earning assets exceeds interest expense incurred on interest-
bearing liabilities. Interest-earning assets include loans, investment securities and certificates of deposit in banks. Interest-bearing
liabilities include interest-bearing deposits and borrowed funds such as sweep accounts and repurchase agreements. Net interest
income, which is the primary source of revenue for the Bank, is also impacted by changes in market interest rates, as well as the
mix of interest-earning assets and interest-bearing liabilities. Net interest income is impacted favorably by increases in noninterest
bearing demand deposits and equity.
42
Net interest margin is calculated by dividing net interest income by average interest-earning assets and serves as a measurement of
the net revenue stream generated by the Bank’s balance sheet. Net interest margin (tax equivalent) was 3.57% in 2020 compared
to 3.53% in 2019. The net interest margin continues to face considerable pressure due to falling interest rates and competitive
pricing of loans and deposits in the Bank’s markets. During 2020, the Federal Reserve lowered its key interest rate from a range
of 1.50% to 1.75% to a range of 0.00% to 0.25%. Management’s estimate of the impact of future changes in market interest rates
is shown in the section captioned Interest Rate Risk, in Item 7A – Quantitative and Qualitative Disclosures About Market Risk
included elsewhere in this report.
Net interest spread is calculated by taking the difference between interest earned on earning assets and interest paid on interest-
bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk. Net
interest spread (tax-equivalent) was 3.32% in 2020 compared to 3.19% and 3.26% in 2019 and 2018, respectively. The difference
between the net interest margin (tax-equivalent) and net interest spread (tax-equivalent) was 25 basis points in 2020 compared to
34 basis points in 2019. This was due to an increase of $243.9 million in average noninterest bearing demand deposits.
Company management continues to analyze methods to deploy assets into an earning asset mix which will result in a stronger net
interest margin. Loan growth continues to be strong and management anticipates that loan activity will remain strong in the near-
term future.
During 2020, net interest income increased by $9.4 million, or 15.9%, to $68.8 million from $59.4 million in 2019. This increase
is largely due to the decrease in the cost of interest-bearing liabilities of 83 basis points outpacing the decrease in yield on earning
assets of 70 basis points. Also impacting the yield were the Summit sale, First State accretion and amortization of PPP fees.
Average total earning assets was $1.96 billion in 2020 compared to $1.71 billion in 2019. Although there was an increase in
average total earning assets, total interest income decreased by $1.9 million, or 2.3%, to $80.5 million in 2020 from $82.4 million
in 2019. This decrease in total interest income was driven by the effect of the Federal Reserve lowering its key interest rates,
which resulted in the decrease in yield on earning assets of 70 basis points. Average total loans and loans held-for-sale increased
to $1.56 billion in 2020 from $1.46 billion in 2019, primarily as the result of a $149.2 million increase in average commercial
loans; however, PPP loans with an outstanding balance of $82.0 million accounted for a portion of the increase and carried just a
1% yield, outside of origination fee accretion. Yield on total loans and loans held-for-sale decreased 46 basis points. Changes in
the balance sheet related to the Summit and First State transactions also impacted yield on earning assets.
Average investment securities increased $33.3 million as the result of a $41.2 million increase in tax-exempt investments,
partially offset by a $7.9 million decrease in taxable investments. Yield on tax-exempt securities decreased 61 basis points and
taxable securities yield decreased 35 basis points.
Average interest-bearing liabilities decreased in 2020 by $1.9 million. The decrease was primarily the result of decreases of
$115.4 million in the average balance of FHLB and other borrowings and $37.9 million in the average balance of certificates of
deposit, partially offset by increases of $127.0 million in money market checking accounts and $27.0 million in the average
balance of negotiable order of withdrawal accounts.
Average interest-bearing deposits grew to $1.28 billion in 2020 from $1.16 billion in 2019. Total interest expense decreased by
$11.3 million, caused primarily by a $7.1 million decrease in deposit interest and a $3.7 million decrease in interest on FHLB and
other borrowings. The result was a 83-basis point decrease in the cost of interest bearing liabilities from 2019 to 2020.
The Company’s average earning assets increased $246.6 million and net interest income increased by $9.4 million during 2020.
The net interest margin continues to be pressured by falling rates and increased competition for high quality loan growth.
The Bank’s yield on earning assets declined during 2020 due to decreases in the loan portfolio yield of 46 basis points, driven by
the addition of PPP loans originated in the second quarter of 2020, and the investment portfolio yield of 29 basis points, while the
cost of interest bearing liabilities decreased by 83 basis points.
The cost of interest-bearing liabilities decreased to 0.85% in 2020 from 1.68% in 2019. This decrease is primarily the result of
decreases of 103 basis points in the cost of FHLB and other borrowings and a 70 basis point decrease in the cost of deposits.
Further discussion on borrowings is included in Note 7 – Borrowed Funds accompanying the consolidated financial statements
included elsewhere in this report.
Provision for Loan Losses
The Company’s provision for loan losses for 2020, 2019 and 2018 was $16.6 million, $1.8 million and $2.4 million, respectively.
43
The provision for loan losses, which is a product of management’s quarterly analysis, is recorded in response to inherent losses in
the loan portfolio.
Substantially all of the increase in loan loss provision is the result of changes to the qualitative adjustment factors in response to
the COVID-19 pandemic, enhancements to the qualitative adjustment factor framework itself and adjustments to the risk grading
of significant loans within the portfolio, as well as changes in the outstanding balances of the loan portfolios, the level of
recognized charge-offs and the resulting historical loss rates.
Determining the appropriate provision for loan losses requires considerable management judgment. In exercising this judgment,
management considers numerous internal and external factors including, but not limited to, portfolio growth, national and local
economic conditions, trends in the markets served and guidance from the Bank’s primary regulators.
Management has continued to evaluate the qualitative factor framework within the allowance for loan loss methodology in order
to assess how well the framework can appropriately respond to the unprecedented risk presented by the COVID-19 pandemic. As
a result, the framework was significantly enhanced to consider a much greater degree of risk than when the framework was
originally designed. The framework has consistently generated an adequate allowance for loan loss within a generally stable
economic environment, but the onset of the pandemic made it apparent that the framework required modifications to consider this
greater degree of risk. These enhancements resulted in the need for $12.8 million in additional loan loss provision in 2020. While
the ultimate timing and severity of impacts to the economic and business conditions in which we operate are not yet fully known,
it is clear that the impacts will continue to be significant and it is likely that the impacts will evolve over time as businesses and
individuals learn to adapt. The breadth of the worldwide COVID-19 pandemic and impacts impact on virtually all industries has
created additional risk within the loan portfolios, despite there being no change to the nature of those portfolios. Furthermore, as a
result of the ongoing analysis of the loan portfolios, a significant number of borrowers are experiencing a strain on their
operations, and as a result present an greater risk of default. Additionally, consumer sentiment has been impacted.
Other significant factors include the increasingly volatile social atmosphere, the evolving political climate in the United States and
the distribution and acceptance of a COVID-19 vaccine. The unprecedented initiatives of the United States government to provide
support to the economy through new loan programs has simultaneously served to temporarily mitigate some of the impacts to the
economy and the Company's borrowers, while also adding some degree of increased risk to lending policies and procedures as a
result of the pace and manner in which these programs have been developed and made available to the public. As a result,
quantifiable evidence of the impacts to the Company's loan portfolios has not yet been fully realized in terms of delinquent loans
or deterioration in collateral values. Meanwhile, as of December 31, 2020, management had not made any significant changes to
lending strategies that would impact the concentrations of credit risk within those portfolios. Additionally, the risk grade
adjustment of significant loans within the portfolio in response to increased risk presented by the COVID-19 pandemic resulted in
the need for roughly $3.8 million in additional loan loss provision.
Meanwhile, total loan balances, excluding purchased credit impaired (“PCI”) loans, increased $41.1 million in 2020 versus an
increase of $69.7 million in 2019. The commercial loan portfolio increased by $77.3 million in 2020, in comparison to an increase
of $122.8 million in 2019, while the residential mortgage loan portfolio decreased by $31.3 million and $23.3 million in 2020 and
2019, respectively. Included in the commercial and total loan volume increases are PPP loans totaling $82.0 million as of
December 31, 2020. Also, net charge-offs in 2020 totaled $2.1 million, in comparison to net charge-offs of $1.0 million in 2019.
Lastly, provision was impacted by a $0.7 million increase in the specific loan loss allocations in 2020, relative to a $0.5 million
decrease in 2019.
Noninterest Income
Payment card and service charge income, mortgage fee income, consulting compliance income, and gains on equity securities
generate the core of the Company’s noninterest income. During 2020, equity method investment income and gains on acquisition
and divestiture activity have generated additional noninterest income. Total of noninterest income for 2020, 2019 and 2018 was
$91.8 million, $64.6 million and $38.6 million, respectively.
The increase in noninterest income for 2020 compared to 2019 was primarily the result of increases of $24.2 million in income
from ICM, $17.6 million in gains on acquisition and divestiture activity, $3.5 million in compliance consulting income and $3.5
million in gain on sale of equity securities. These increases were partially offset by decreases of $13.4 million in holding gain on
equity securities and $7.6 million in mortgage fee income.
Equity method investment income of $24.2 million was due to the ICM combination in July 2020. Prior to this combination,
income from the Company's mortgage activities was recognized through mortgage fee income. Mortgage fee income decreased
44
$7.6 million from $41.0 million in 2019 to $33.4 million in 2020 due to the ICM combination in July 2020. Prior to this
combination, income from the Company's mortgage activities was recognized through mortgage fee income.
Gains on acquisition and divestiture activity of $17.6 million was primarily due to gains of $9.6 million on the divestiture of four
branch locations and $4.7 million on the acquisition of branch locations from First State.
Compliance consulting income increased $3.5 million from $0.9 million in 2019 to $4.4 million in 2020, driven by the Chartwell
acquisition in September 2019.
Gain on sale of equity securities of $3.5 million was primarily driven by a gain on sale from the Company's Fintech investment
portfolio in the fourth quarter of 2020.
Holding gain on equity securities decreased $13.4 million from $13.8 million in 2019 to $0.4 million in 2020, primarily due to an
increase in the valuation of the Company’s Fintech investment portfolio during the second quarter of 2019.
Noninterest Expense
Noninterest expense was $97.1 million, $87.2 million and $72.9 million in 2020, 2019 and 2018, respectively. Approximately
63%, 64% and 63% of noninterest expense for 2020, 2019 and 2018, respectively, related to personnel costs. Personnel costs are a
significant part of the Company's noninterest expense as such costs are critical to services organizations. Salaries and benefits
increased by $5.5 million in 2020, primarily as a result of the build-out of Company administration, the Fintech team and the
additional team members acquired as a result of the Chartwell acquisition in September 2019.
Professional fees increased by $3.5 million in 2020, primarily the result of deal costs related to the acquisitions of First State and
Paladin, the sale of the Eastern Panhandle banking centers and the ICM combination.
Data processing and communications increased $1.4 million in 2020, primarily as a result of data conversion costs related to the
acquisition of First State, the acquisition of Paladin, LLC, the sale of the Eastern Panhandle banking centers, and the ICM
combination.
Other operating expense increased $1.7 million in 2020, mainly driven by increased loan expense and real estate expense related
to the First State acquisition.
Income Taxes
The Company incurred income tax expense of $9.5 million, $8.6 million and $3.4 million in 2020, 2019 and 2018, respectively.
The Company’s effective tax rate was 20%, 24% and in 2020, 2019 and 2018, respectively. The decrease in effective tax rate
from 2019 to 2020 was primarily driven by increased investment in tax-free municipal investments and a reduction in the net state
tax rate. The Company’s effective tax rate is affected by certain permanent tax differences caused by statutory requirements in the
tax code. The largest permanent difference relates to tax-exempt interest income related to municipal investments and loans held
by the Company. Other, smaller permanent differences arise from income derived from life insurance purchased on certain key
employees and directors and meals and entertainment expenses.
Returns on Assets and Equity
Assets
The Company’s return on average assets was 1.7% in 2020, compared to 1.4% in 2019. The increased return in 2020 is a result of
a $10.4 million increase in earnings, while average total assets increased by $298.7 million, mainly as the result of a $116.0
million increase in average interest-bearing deposits with banks and a $98.9 million increase in average total loans.
Equity
The Company’s return on average stockholders’ equity was 16.7% in 2020, compared to 13.6% in 2019. The increased return in
2020 is a result of a $10.4 million increase in earnings, while average equity increased by $29.3 million.
45
Statement of Financial Condition
Cash and Cash Equivalents
Cash and cash equivalents totaled $263.9 million at December 31, 2020, compared to $28.0 million at December 31, 2019.
Management believes the current balance of cash and cash equivalents adequately serves the Company’s liquidity and
performance needs. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity
demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available
access to traditional and non-traditional funding sources and the portions of the investment and loan portfolios that mature within
one year. These sources of funds should enable the Company to meet cash obligations as they come due. Due to the increase in
liquidity driven by growth in noninterest-bearing deposits, management has elected to maintain a higher cash and cash equivalents
balance to provide flexibility during the COVID-19 pandemic.
Investment Securities
Investment securities totaled $438.2 million at December 31, 2020, compared to $254.3 million at December 31, 2019.
The following table sets forth a summary of the investment securities portfolio as of the dates indicated. The available-for-sale
securities are reported at estimated fair value.
December 31, (Dollars in thousands)
Available-for-sale securities:
United States government agency securities
United States sponsored mortgage-backed securities
Municipal securities
Other debt securities
Other securities
Total investment securities available-for-sale
Equity securities
2020
2019
56,992 $
95,769
231,887
7,500
18,476
410,624 $
51,996
58,312
113,092
—
12,421
235,821
27,585 $
18,514
$
$
$
At December 31, 2020, investment securities are available-for-sale or equity securities. Management believes the available-for-
sale classification provides flexibility in terms of managing the portfolio for liquidity, yield enhancement and interest rate risk
management opportunities. Due to the increase in liquidity driven by growth in noninterest-bearing deposits, management has
elected to increase balances in investment securities to generate additional interest income. At December 31, 2020, the amortized
cost of available-for-sale investment securities totaled $400.7 million, resulting in a net unrealized gain in the investment portfolio
of $9.9 million. Management has the intent and ability to hold the investments to maturity and they are all high quality
investments with no other than temporary impairment. The municipal securities continue to give the Company the ability to
pledge and to decrease the effective tax rate.
At December 31, 2020, equity securities primarily consist of the Company's Fintech investment portfolio and are comprised of
investments in six companies with a carrying value of $23.1 million. These securities do not have readily determinable fair values;
therefore, they are classified as equity securities and are recorded at cost and adjusted for observable price changes for underlying
transactions for identical or similar investments.
46
United States
government
agency securities
United States
sponsored
mortgage-backed
securities
Municipal
securities
Other debt
securities
Other securities
Total
$
The following table shows the maturities for the available-for-sale investment securities portfolio at December 31, 2020:
Within one year
After one year, but
within five
After five years, but
within ten
After ten years
Total investment
securities
(Dollars in
thousands)
Amortized
Cost
Weighted-
Avg. Yield
Amortized
Cost
Weighted-
Avg. Yield
Amortized
Cost
Weighted-
Avg. Yield
Amortized
Cost
Weighted-
Avg. Yield
Amortized
Cost
Fair
Value
$
—
— % $
6,029
2.06 % $
19,536
1.32 % $
30,642
1.36 % $
56,207 $ 56,992
—
—
—
—
—
—
—
—
—
—
—
2,241
0.81
92,727
1.69
94,968
95,769
2,790
3.22
13,821
2.93
207,031
2.51
223,642
231,887
—
1,955
—
4.23
—
23,946
—
5.71
7,500
—
—
—
7,500
25,901
7,500
18,476
— % $
10,774
2.75 % $
59,544
3.44 % $ 330,400
2.17 % $ 408,218 $ 410,624
Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that
may occur.
Management monitors the earnings performance and liquidity of the investment portfolio on a regular basis through the Asset and
Liability Committee (“ALCO”) meetings. The ALCO also monitors net interest income and assists in the management of interest
rate risk for the Company. Through active balance sheet management and analysis of the investment securities portfolio, sufficient
liquidity is maintained to satisfy depositor requirements and the various credit needs of its customers. Management believes the
risk characteristics inherent in the investment portfolio are acceptable based on these parameters.
Loans
The Company’s primary market areas are North Central West Virginia and Northern Virginia. The portfolio consists principally
of commercial lending, retail lending, which includes single-family residential mortgages, and consumer lending. Loans totaled
$1.45 billion as of December 31, 2020, an increase of $79.2 million from $1.37 billion as of December 31, 2019. As of
December 31, 2019, the balance of loans classified as held-for-sale as a result of the sale of four branch locations to Summit
during 2020 was $42.9 million.
Major classification of loans held for investment, including PCI loans, at December 31, are as follows:
(Dollars in thousands)
Commercial and non-residential real estate
Residential real estate and home equity
Consumer and other
Total Loans
Deferred loan origination fees and costs, net
Loans receivable
$
$
$
$
2020
2019
1,162,122 $
288,035
4,644
1,454,801 $
(1,057) $
1,453,744 $
1,063,828
306,710
3,697
1,374,235
306
1,374,541
At December 31, 2020, commercial and non-residential real estate loans, including PCI loans, represented the largest portion of
the portfolio at 79.9%. Commercial and non-residential real estate loans totaled $1.16 billion at December 31, 2020, compared to
$1.06 billion at December 31, 2019. Management will continue to focus on the enhancement and growth of the commercial loan
portfolio while maintaining appropriate underwriting standards and risk/price balance. PPP loans are included in the totals above
and have outstanding balances of $82.0 million as of December 31, 2020 and are the primary driver of the increase.
Residential real estate loans to retail customers, including home equity lines of credit and PCI loans, account for the second
largest portion of the loan portfolio, comprising 19.8%. Residential real estate and home equity loans totaled $288.0 million at
December 31, 2020, compared to $306.7 million at December 31, 2019. Included in residential real estate loans are home equity
credit lines totaling $30.8 million at December 31, 2020, compared to $35.1 million at December 31, 2019. Management believes
the home equity loans are competitive products with an acceptable return on investment after risk considerations. Residential real
estate lending continues to represent a primary focus due to the lower risk factors associated with this type of loan and the
opportunity to provide service to those in the North Central West Virginia and Norther Virginia markets.
47
For discussion related to the PCI loans acquired in the First State acquisition and their related allowance for loan losses, please
refer to Purchased Credit Impaired Loans in Note 3 – Loans and Allowance for Loan Losses accompanying the consolidated
financial statements included elsewhere in this report.
At December 31, 2020, loans identified by management as potential problem loans amounted to $59.1 million. The balance is
comprised of 16 loans, which include $33.5 million in seven commercial real estate office/retail loans to two relationships, an
$8.6 million residential real estate development loan, $7.7 million in three related loans to a retail commercial real estate
corporation, a $4.7 million commercial real estate loan to a senior care facility, $3.0 million to finance two related hospitality
properties and $1.6 million in two loans to finance a multifamily property. These are loans for which information about the
borrowers’ possible credit problems causes management to have doubts as to the borrowers’ ability to comply with the loan
repayment terms in the future. However, these loans were all also significantly impacted by the pandemic and as a result have
qualified for government financial support and/or debt service relief from the Bank. These loans are being monitored closely, but
were not considered impaired loans at December 31, 2020.
There were thirteen additional loans to five relationships that management identified as problem loans, totaling $42.0 million as of
December 31, 2020. These loans include $32.5 million in five loans to finance hospitality properties to two unrelated borrowers,
$5.2 million in three loans to a single borrower to finance movie theaters and a multifamily real estate property, a $2.2 million
loan to finance a Montessori school and $2.1 million in three loans to a borrower in the energy industry. These are loans where
known information about the borrowers’ credit problems causes management to have serious doubts, relative to the sixteen loans
discussed above, as to the borrowers’ ability to comply with the loan repayment terms in the future. However, these loans were all
significantly impacted by the pandemic and as a result have qualified for government financial support and/or debt service relief
from the Bank. These loans are being monitored closely, but as of year-end were not considered impaired loans.
The following table provides loan maturities at December 31, 2020:
(Dollars in thousands)
Commercial and non-residential real estate
Residential real estate and home equity
Consumer and other
Total Loans
One Year
or Less
One Through
Five Years
Due After Five
Years
Total
$
$
282,821 $
32,338
1,386
316,545 $
574,496 $
76,758
2,486
653,740 $
304,805 $ 1,162,122
288,035
178,939
4,644
772
484,516 $ 1,454,801
The preceding data has been compiled based upon the earlier of either contractual maturity or next repricing date.
The following table reflects the sensitivity of loans to changes in interest rates as of December 31, 2020 that mature after one
year:
(Dollars in thousands)
Predetermined fixed interest rate
Floating or adjustable interest rate
Total as of December 31, 2020
Loan Concentration
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
Consumer and
Other
$
$
160,257 $
719,044
879,301 $
116,717 $
138,980
255,697 $
2,051 $
1,207
3,258 $
Total
279,025
859,231
1,138,256
At December 31, 2020, commercial and non-residential real estate loans comprised the largest component of the loan portfolio. A
large portion of commercial loans are secured by real estate and they are diverse with respect to geographical location and
industry. Loans that are not secured by real estate are typically secured by accounts receivable, mortgages or equipment. While
the loan concentration is in commercial loans, the commercial portfolio is comprised of loans to many different borrowers, in
numerous different industries, primarily located in the Company's market areas.
Allowance for Loan Losses
Management continually monitors the risk in the loan portfolio through review of the monthly delinquency reports and the Loan
Review Committee. The Loan Review Committee is responsible for the determination of the adequacy of the allowance for loan
losses (“ALL”). This analysis involves both experience of the portfolio to date and the makeup of the overall portfolio. Specific
loss estimates are derived for individual loans based on specific criteria such as current delinquent status, related deposit account
activity where applicable and changes in the local and national economy. When appropriate, management also considers public
48
knowledge and/or verifiable information from the local market to assess risks to specific loans and the loan portfolios as a whole.
The result of the evaluation of the adequacy at each period presented herein indicated that the ALL was considered by
management to be adequate to absorb losses inherent in the loan portfolio.
At December 31, 2020 and 2019, impaired loans totaled $15.4 million and $9.5 million, respectively. A portion of the ALL of
$1.3 million and $0.6 million was allocated to cover any loss in these loans at December 31, 2020 and 2019, respectively. Loans
past due more than 30 days were $10.6 million and $9.3 million, respectively, at December 31, 2020 and 2019.
Loans past due more than 30 days to gross loans
Loans past due more than 90 days to gross loans
December 31,
2020
2019
1.2 %
0.6 %
0.7 %
0.1 %
Net charge-offs of $2.1 million in 2020 and $1.0 million in 2019 were incurred. The provision for loan losses was $16.6 million in
2020 and $1.8 million in 2019. Net charge-offs represented 0.1% and 0.1% in 2020 and 2019, respectively, compared to gross
loans for the indicated period.
For tables reflecting the allocation of the ALL, please refer to Note 3 – Loans and Allowance for Loan Losses accompanying the
consolidated financial statements included elsewhere in this report.
(Dollars in thousands)
2020
2019
December 31,
Commercial and non-residential real estate
Residential real estate and home equity
Consumer and other
Total
Amount
% of loans in each
category to total loans
Amount
$
$
24,033
2,030
51
26,114
80 % $
20
—
100 % $
10,098
1,599
78
11,775
% of loans in each
category to total loans
78 %
22
—
100 %
Non-performing assets consist of loans that are no longer accruing interest, loans that have been renegotiated to below market
rates based upon financial difficulties of the borrower and real estate acquired through foreclosure. When interest accruals are
suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally
charged off as a credit loss. When, in management’s judgment, the borrower’s ability to make periodic interest and principal
payments resumes and collectability is no longer in doubt, which is evident by the receipt of six consecutive months of regular,
on-time payments, the loan is eligible to be returned to accrual status. Interest income on loans would have increased by
approximately $0.6 million, $0.6 million and $0.8 million for 2020, 2019 and 2018, respectively, if loans had performed in
accordance with their terms.
Non-performing assets and past due loans as of December 31, are as follows:
(Dollars in thousands)
Non-accrual loans
Commercial
Real estate and home equity
Consumer and other
Total non-accrual loans
Accruing loan past due 90 days or more
Total non-performing loans
Other real estate, net
Total non-performing assets
Allowance for loan losses
Non-performing loans to gross loans
Allowance for loan losses to non-performing loans
Non-performing assets to total assets
$
$
$
2020
2019
12,079 $
1,629
5
13,713
—
13,713
5,730
19,443 $
25,844 $
3,533
1,556
34
5,123
—
5,123
1,397
6,520
11,775
0.9%
188.5%
0.8%
49
0.4%
229.8%
0.3%
Impaired loans have increased by $5.9 million, or 62.3%, during 2020. This change is the net effect of multiple factors, primarily
the identification of $7.1 million of recently impaired loans, principal curtailments/payoffs of $3.0 million, the acquisition of $2.5
million in impaired loans obtained through the acquisition of First State, normal loan amortization of $0.5 million and the
reclassification of $0.1 million of previously reported impaired loans to performing loans.
The $7.1 million of recently impaired loans were concentrated in two commercial relationships representing $6.1 million, or 86%,
of the recently impaired loans. One relationship of $5.2 million is currently under a forbearance agreement and paying as agreed.
The remaining relationship is secured by a borrowing base.
The $3.0 million of principal curtailments/payoffs were concentrated in two commercial relationships in which the notes were
refinanced out of the bank by outside lenders. These two relationships represented $2.7 million, or 88%, of the total principal
curtailments.
The $2.5 million of purchased impaired loans were concentrated in two commercial relationships representing $2.2 million, or
88%, of the purchased impaired loans. One relationship of $1.5 million is secured by residential lots for development and the
second relationship of $0.7 million is secured by a single-family home that is partially constructed.
Loans classified as Special Mention totaled $67.9 million and $25.2 million as of December 31, 2020 and December 31, 2019,
respectively. The increase of $42.7 million, or 169.4%, was concentrated in the commercial loan portfolio. This increase is
primarily the result of the risk grade downgrade of 16 loans to eight separate loan relationships, totaling $63.5 million, offset by
the payoff of six existing loans totaling $15.0 million, the risk grade upgrade of a $1.5 million loan and the charge-off of two
loans totaling $1.9 million. Of the 16 loans recently classified as Special Mention, seven commercial real estate office/retail loans
to two separate relationships each centered around a single guarantor totaled $33.5 million, one residential real estate development
loan totaled $8.6 million, three related loans to a retail commercial real estate corporation totaled $7.7 million, a commercial real
estate loan to a senior care facility totaled $4.7 million, two related hospitality loans totaled $3.0 million and two loans to a
multifamily property totaled $1.6 million. The operations of all these borrowers were significantly impacted by the COVID-19
pandemic. The $15.0 million in payoffs included an $8.3 million note secured by subordinate bonds related to a sales tax
increment financing district, which had not been refinanced as timely as anticipated due to delays in the reissuance of senior
position bonds. Two unrelated loans, a $3.4 million loan secured by a senior care facility, and a $2.8 million loan secured by a
multifamily rental property, were refinanced outside of the Company.
Loans classified as Substandard totaled $58.3 million and $18.6 million as of December 31, 2020 and December 31, 2019,
respectively. The increase of $39.7 million, or 214%, was concentrated in the commercial loan portfolio. The increase is primarily
the result of the risk grade downgrade of 13 loans to six separate commercial loan relationships, totaling $42.7 million, offset by
the payoff of two existing loans totaling $3.6 million and the $0.9 million, or 15%, curtailment of three related equipment loans.
Of the 13 loans recently classified as Substandard, five loans totaling $32.5 million were provided to two borrowers to finance
hospitality properties. Four of the recently classified loans, totaling $5.2 million were provided to a single loan relationship to
finance two movie cinemas and an outdoor recreation oriented multifamily rental property. Additionally, the recently classified
loans include a $2.2 million loan to finance a Montessori school and three loans totaling $2.1 million to finance equipment for a
borrower in the energy industry. The operations of all these borrowers were significantly impacted by the COVID-19 pandemic.
The $3.6 million in payoffs included a $2.0 million line of credit secured by the account receivables of senior care facility that has
struggled to collect its receivables and government reimbursements in a timely manner, which had placed considerable strain on
operating performance. The remaining $1.6 million was a loan that had been classified since the financial difficulties caused by
the Great Recession.
Loans classified as Doubtful totaled $4.0 million and $0.1 million as of December 31, 2020 and December 31, 2019, respectively.
The increase of $3.9 million was concentrated in the commercial loan portfolio and is the result of the risk grade downgrade of
four loans to three unrelated borrowers and the acquisition of five loans to unrelated borrowers obtained as part of the First State
acquisition. As of December 31, 2020, a loan loss reserve allocation of $0.7 million has been recognized on the largest of the
loans, which had a balance of $0.9 million. Three loans totaling $0.4 million are the balances that remain after partial charge offs
totaling $0.07 million and are subject to ongoing workout plans. The largest of purchased loans had a balance of $1.5 million,
while the remaining three loans had balances of $0.7 million, $0.2 million, and $0.09 million.
Funding Sources
The Bank considers a number of alternatives, including but not limited to deposits, short-term borrowings and long-term
borrowings when evaluating funding sources. Traditional deposits continue to be the most significant source of funds, totaling
50
$1.98 billion, or 97.4% of funding sources, at December 31, 2020. This same information at December 31, 2019 reflected $1.27
billion in deposits representing 84.2% of such funding sources. FHLB and other borrowings and subordinated debt represented
14.8% of funding sources at December 31, 2019. There were no FHLB and other borrowings at December 31, 2020. Subordinated
debt totaled $43.4 million at December 31, 2020. Repurchase agreements, which are available to large corporate customers,
represented 0.5% and 0.7% of funding sources at December 31, 2020 and 2019, respectively.
Management continues to emphasize the development of additional noninterest-bearing deposits as a core funding source for the
Company. At December 31, 2020, noninterest-bearing balances totaled $715.8 million, compared to $278.5 million at
December 31, 2019, or 36.1% and 22.0% of total deposits, respectively. Interest-bearing deposits totaled $1.27 billion at
December 31, 2020, compared to $986.5 million at December 31, 2019, or 63.9% and 78.0% of total deposits, respectively. The
main driver of deposit growth has been the increase in Fintech deposits through adding new relationships and continuing to grow
current relationships. This growth in Fintech deposits is primarily due to the increasing in gaming deposits, primarily as a result of
the increasing number of states legalizing sports gaming. The Company currently expects its Fintech banking to continue to grow.
The following table sets forth the balance of each of the deposit categories for the years ended December 31, 2020 and 2019:
(Dollars in thousands)
Demand deposits of individuals, partnerships and corporations
Noninterest-bearing demand
Interest-bearing demand
Savings and money markets
Time deposits including CDs and IRAs
Total deposits
Time deposits that meet or exceed the FDIC insurance limit
2020
2019
$
$
$
715,791 $
496,502
545,501
224,595
1,982,389 $
278,547
351,435
363,026
272,034
1,265,042
16,955 $
8,955
Average interest-bearing deposits totaled $1.28 billion during 2020 compared to $1.16 billion during 2019. Average noninterest
bearing deposits totaled $502.5 million during 2020 compared to $258.5 million during 2019. Amounts for 2019 include
noninterest bearing deposits at branches classified as held-for-sale.
Maturities of time deposits, including time deposits at branches held-for-sale, that met or exceeded the FDIC insurance limit as of
December 31, 2020:
(Dollars in thousands)
Under three months
Over three to 12 months
Over one to three years
Over three years
Total
$
$
2020
3,942
2,598
10,161
254
16,955
Along with traditional deposits, the Bank has access to both short-term borrowings from FHLB and overnight repurchase
agreements to fund its operations and investments. For details on the Company's borrowings, please refer to Note 7 – Borrowed
Funds accompanying the consolidated financial statements included elsewhere in this report.
Capital and Stockholders’ Equity
During the year ended December 31, 2020, stockholders’ equity increased approximately $27.5 million to $239.5 million. This
increase consists of net income for the year of $37.4 million, common stock options exercised totaling $4.5 million, a $3.5 million
increase in accumulated other comprehensive income, stock-based compensation of $2.4 million and common stock issued related
to the Paladin acquisition totaling $0.2 million. These changes were offset by common stock repurchased totaling $15.7 million,
primarily from the Company's December 2020 tender offer, and dividends paid totaling $4.7 million. With the stockholders’
equity increasing as noted above, the equity to assets ratio decreased from 10.9% to 10.3% due to equity growth outpacing the
$387.4 million increase in total assets during 2020. The Company paid dividends to common shareholders of $4.3 million in 2020
and $2.3 million in 2019 compared to earnings of $37.4 million in 2020 versus $27.0 million in 2019, resulting in the dividend
payout ratio increasing from 8.5% in 2019 to 11.4% in 2020.
The Company and the Bank are also subject to various regulatory capital requirements administered by federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by
51
regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. The Bank is
required to comply with applicable capital adequacy standards established by the FDIC. The Company is exempt from the Federal
Reserve Board’s capital adequacy standards as it believes it meets the requirements of the Small Bank Holding Company Policy
Statement. West Virginia state chartered banks, such as the Bank, are subject to similar capital requirements adopted by the West
Virginia Division of Financial Institutions. Bank regulators have established “risk-based” capital requirements designed to
measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets companies hold in their portfolios. A
weight category of 0% (lowest risk assets), 20%, 50%, 100% or 150% (highest risk assets) is assigned to each asset on the balance
sheet. Detailed information concerning the Company’s risk-based capital ratios can be found in Supervision and Regulation in
Item 1 – Business and Note 15 – Regulatory Capital Requirements accompanying the consolidated financial statements included
elsewhere in this report.
At December 31, 2020, the Bank’s risk-based capital ratios were above the minimum standards for a well-capitalized institution.
The total risk-based capital ratio of 15.8% at December 31, 2020 is above the well capitalized standard of 10%. The Tier 1 risk-
based capital ratio of 14.6% at December 31, 2020 also exceeded the well capitalized minimum of 8%. The common equity Tier 1
capital ratio of 14.6% at December 31, 2020 is above the well capitalized standard of 6.5%. The leverage ratio at December 31,
2020 was 11.0% and was also above the well capitalized standard of 5%. Management believes that capital continues to provide a
strong base for profitable growth.
Liquidity
Maintenance of a sufficient level of liquidity is a primary objective of the ALCO. Liquidity, as defined by the ALCO, is the
ability to meet anticipated operating cash needs, loan demand and deposit withdrawals, without incurring a sustained negative
impact on net interest income. It is the Company’s policy to manage liquidity so that there is no need to make unplanned sales of
assets or to borrow funds under emergency conditions.
The main source of liquidity for the Bank comes through deposit growth. Liquidity is also provided from cash generated from
investment maturities, principal payments from loans and income from loans and investment securities. During the year ended
December 31, 2020, cash provided by financing activities totaled $417.8 million, while outflows from investing activity totaled
$294.1 million. When appropriate, the Bank has the ability to take advantage of external sources of funds such as advances from
the FHLB, national market certificate of deposit issuance programs, the Federal Reserve discount window, brokered deposits and
Certificate of Deposit Account Registry Services. These external sources often provide attractive interest rates and flexible
maturity dates that enable the Bank to match funding with contractual maturity dates of assets. Securities in the investment
portfolio are classified as available-for-sale and can be utilized as an additional source of liquidity.
The Company has an effective shelf registration covering $75 million of debt and equity securities, all of which is available,
subject to authorization from the Board of Directors and market conditions, to issue debt or equity securities at the Company's
discretion. While the Company seeks to preserve flexibility with respect to cash requirements, there can be no assurance that
market conditions would permit it to sell securities on acceptable terms, or at all.
With the changes in the industry related to COVID-19, the Company has focused on maintaining greater liquidity. Management
believes liquidity needs could be greater during this volatile time within the industry and markets. Based upon this volatility, the
Company has adjusted the balance sheet to maintain a greater balance of cash and cash equivalents than has typically been used to
maintain liquidity.
52
Contractual Obligations
The following table reflects the contractual maturities of the Company's term liabilities as of December 31, 2020. The amounts
shown do not reflect contractual interest, early withdrawal or prepayment assumptions.
(Dollars in thousands)
Certificates of deposit and individual retirement accounts 1
Securities sold under agreement to repurchase
Operating leases
Finance leases
Subordinated debt
Less than one
year
One to three
years
Three to five
years
More than
five years
Total
$
126,863 $
83,697 $
14,035 $
— $
224,595
10,266
1,779
68
—
—
3,448
100
—
—
3,488
10
—
—
14,280
4
43,407
10,266
22,995
182
43,407
Total
301,445
1 Certificates of deposit give customers rights to early withdrawal. Early withdrawals may be subject to penalties. The penalty
amount depends on the remaining time to maturity at the time of early withdrawal.
138,976 $
57,691 $
87,245 $
17,533 $
$
Off-Balance Sheet Arrangements
The Bank has entered into certain agreements that represent off-balance sheet arrangements that could have a significant impact
on the consolidated financial statements and could have a significant impact in future periods. Specifically, the Bank has entered
into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. In addition,
the Bank utilizes letters of credit issued by the FHLB to collateralize certain public funds deposits. Further discussion of these
agreements, including the amounts outstanding at December 31, 2020, is included in Note 8 – Commitments and Contingent
Liabilities, accompanying the consolidated financial statements included elsewhere in this report.
Commitments to extend credit, including loan commitments, standby letters of credit and commercial letters of credit do not
necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.
Future Outlook
The Company has invested in the infrastructure to support anticipated future growth in each key area, including personnel,
technology and processes to meet the growing compliance requirements in the industry. The Company believes it is well
positioned in some of the finest markets in West Virginia and Virginia and will continue to focus on margin improvement;
leveraging capital; organic portfolio loan growth; and operating efficiency. The key challenge for the Company in the future is to
attract core deposits to fund growth in new markets through continued delivery of outstanding client service coupled with high-
quality products and technology. The Company is expanding the treasury services function to support the banking needs of
financial and emerging technology companies, which will further enhance core deposits, notably through its expansion of deposit
acquisition and fee income strategies through the Fintech division. During 2020, the Company entered into agreements for card
acquiring sponsorships and debit card program sponsorship to further enhance fee income and noninterest income.
Critical Accounting Policies
Significant accounting policies followed by the Company are presented in Note 1 – Summary of Significant Accounting Policies
accompanying the consolidated financial statements included elsewhere in this report. These policies, along with the disclosures
presented in the other financial statement notes and in this Management’s Discussion and Analysis, provide information on how
significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on
the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates
underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area
that requires the most subjective or complex judgments and as such could be most subject to revision as new information becomes
available.
Allowance for Loan Losses
The ALL represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of
the ALL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to
the amount and timing of losses inherent in classifications of homogeneous loans based on the Bank’s historical loss experience
and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Non-
homogeneous loans are specifically evaluated due to the increased risks inherent in those loans. The loan portfolio also represents
the largest asset type in the consolidated balance sheet. Note 1 – Summary of Significant Accounting Policies accompanying the
consolidated financial statements included elsewhere in this report describes the methodology used to determine the ALL and a
discussion of the factors driving changes in the amount of the ALL.
Investment Securities
Investment securities at the time of purchase are classified as either available-for-sale securities or equity securities. The
amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed by
a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific
identification of the adjusted cost of each security. Securities are periodically reviewed for other-than-temporary impairment. For
debt securities, management considers whether the present value of future cash flows expected to be collected are less than the
security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons
underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would
be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than
temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security,
and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis,
the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the
difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. A decline in
value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the consolidated statement
of income. Please refer Note 2 – Investment Securities accompanying the consolidated financial statements included elsewhere in
this report for the Company’s policy regarding the other than temporary impairment of investment securities.
Business Combinations
We account for acquisitions under FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which
requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed,
are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because
the fair value of the loans acquired incorporates assumptions regarding credit risk.
PCI loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality,
found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, and
initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans.
Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through
business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable,
at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, such as lines of credit
(consumer and commercial) and loans for which there was no discount attributable to credit are accounted for in accordance with
FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life
of the loan.
For more information regarding the Company's business combinations, please see Note 24 – Acquisitions and Divestitures
accompanying the consolidated financial statements included elsewhere in this report.
For more information on the Company's PCI loans, please see the Purchased Credit Impaired Loans section in Note 3 – Loans
and Allowance for Loan Losses accompanying the consolidated financial statements included elsewhere in this report.
Recent Accounting Pronouncements and Developments
Recent accounting pronouncements and developments applicable to the Company are described further in Note 1 – Summary of
Significant Accounting Policies accompanying the consolidated financial statements included elsewhere in this report.
54
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s market risk is composed primarily of interest rate risk. The ALCO is responsible for reviewing the interest rate
sensitivity position and establishes policies to monitor and coordinate the Company’s sources, uses and pricing of funds.
Interest Rate Risk
The objective of the asset/liability management function is to structure the balance sheet in ways that maintain consistent growth
in net interest income and minimize exposure to market risks within its policy guidelines. This objective is accomplished through
management of balance sheet liquidity and interest rate risk exposure based on changes in economic conditions, interest rate
levels and customer preferences. The Company manages balance sheet liquidity through the investment portfolio, sales of
commercial and residential real estate loans and through the utilization of diversified funding sources, including retail deposits, a
variety of wholesale funding sources and borrowings through the FHLB. Interest rate risk is managed through the use of interest
rate caps, commercial loan swap transactions and interest rate lock commitments on mortgage loans held-for-sale, as well as the
structuring of loan terms that provide cash flows to be consistently re-invested along the rate cycle.
The Company's primary market risk is interest rate fluctuation. Interest rate risk results from the traditional banking activities in
which the Bank engages, such as gathering deposits and extending loans. Many factors, including economic conditions, financial
conditions, movements in interest rates and consumer preferences affect the difference between interest earned on assets and
interest paid on liabilities. The Company’s interest rate risk represents the levels of exposure its income and market values have to
fluctuations in interest rates. Interest rate risk is measured as the change in earnings and the theoretical market value of equity that
results from changes in interest rates. The ALCO oversees the management of interest rate risk and its objective is to maximize
stockholder value, enhance profitability and increase capital, serve customer and community needs and protect the Company from
any material financial consequences associated with changes in interest rates.
Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); changing
rate relationships across yield curves that affect bank activities (basis risk); changing rate relationships across the spectrum of
maturities (yield curve risk); and interest rate related options embedded in certain bank products (option risk). Changes in interest
rates may also affect a bank’s underlying economic value. The values of a bank’s assets, liabilities and interest-rate related, off-
balance sheet contracts are affected by changes in rates because the present values of future cash flows, and in some cases the
cash flows themselves, are changed when discounting by different rates.
The Company believes that accepting some level of interest rate risk is necessary in order to achieve realistic profit goals.
Management and the Board of Directors have chosen an interest rate risk profile that is consistent with the Company's strategic
business plan. While management carefully monitors the exposure to changes in interest rates and takes actions as warranted to
decrease any adverse impact, there can be no assurance about the actual effect of interest rate changes on net interest income.
The Company’s Board of Directors has established a comprehensive interest rate risk management policy, which is administered
by the ALCO. The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest
income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or
“EVE” at risk) resulting from a hypothetical change in interest rates. The Company measures the potential adverse impacts that
changing interest rates may have on short-term earnings, long-term value and liquidity by employing simulation analysis through
the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and
floors embedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain
shortcomings inherent in the interest rate modeling methodology employed. When interest rates change, actual movements in
different categories of interest-earning assets and interest-bearing liabilities, loan prepayments and withdrawals of time and other
deposits, may deviate significantly from assumptions used in the model. Finally, the methodology does not measure or reflect the
impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts or the impact of rate changes on
demand for loan and deposit products.
A base case forecast is prepared using market consensus rate forecasts and alternative simulations reflecting more and less
extreme behavior of rates each quarter. The analysis is presented to the ALCO and the Board of Directors. In addition, more
frequent forecasts are produced when interest rates are particularly uncertain, when other business conditions so dictate, or when
necessary to model potential balance sheet changes.
The balance sheet is subject to quarterly testing for interest rate shock possibilities to indicate the inherent interest rate risk.
Average interest rates are shocked by +/- 100, 200, 300 and 400 basis points (“bp”). The goal is to structure the balance sheet so
55
that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy
guidelines at the various interest rate shock levels.
At December 31, 2020, the Company is shown in an asset sensitive position for the first year after rate shocks. Management
continuously strives to reduce higher costing fixed rate funding instruments, while increasing assets that are more fluid in their
repricing. Theoretically, an asset sensitive position is more favorable in a rising rate environment, since more assets than liabilities
will reprice in a given time frame as interest rates rise. Similarly, a liability sensitive position is theoretically favorable in a
declining interest rate environment, since more liabilities than assets will reprice in a given time frame as interest rates decline.
Management works to maintain a consistent spread between yields on assets and costs of deposits and borrowings, regardless of
the direction of interest rates.
Estimated Changes in Net Interest Income
Change in interest rates
Policy Limit
December 31, 2020
December 31, 2019
25.0 %
42.7 %
5.7 %
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
-300 bp
-400 bp
20.0 %
30.7 %
3.5 %
15.0 %
19.3 %
1.3 %
10.0 %
9.6 %
0.3 %
10.0 %
(6.6) %
(6.9) %
15.0 %
(9.6) %
(18.4) %
20.0 %
(12.4) %
(26.8) %
25.0 %
(12.9) %
(32.5) %
As shown above, measures of net interest income at risk in a rising rate environment were more favorable at December 31, 2020
versus December 31, 2019 and less favorable in a falling rate environment for the same time periods. One factor explaining this
year-over-year difference is the general level of market interest rates. A parallel downward interest rate shock would further
compress the yields on assets and liabilities, while a parallel upward interest rate shock would widen the spread between yields on
assets and liabilities.
Net interest income at risk exceeded policy limits in the -200 bp, -300 bp and -400 bp parallel instantaneous interest rate shock
scenarios. The policy violations in these scenarios are driven largely by the general level or market interest rates described in the
preceding paragraph as well as the Company's cost of funding. The Company's deposit costs are low and have little room to
reprice to a lower interest rate in a falling rate environment. However, the Company's floating rate assets are exposed to the full
effect of repricing to a lower interest rate in a falling rate environment.
The paragraph above discusses net interest income at risk in various shock scenarios; scenarios in which interest rates
immediately move by a large margin. The Company's net interest income profile exhibits declining net interest income when rates
fall gradually, but the impact is not as extreme as is suggested in a shock scenario. Essentially, a gradual interest rate decline
scenario smooths the impact of falling rates over a 12 or 24 month period. The Company's expectation is that over any given one
to two year period, interest rates will likely move at a gradual pace.
As interest rates fall, mortgage companies experience a higher volume of loan originations and refinance activity. This benefit is
not reflected in measures of net interest income at risk, as origination and refinance activity was classified as fee income prior to
the combination with ICM. This increase in fee income represents a benefit to net income that offsets the losses to net interest
income experienced in a falling rate environment. After the ICM combination, the income related to loan originations and
refinance activity is reflected as income from an equity method investment.
The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes
in interest rates on all of the Company’s cash flows and by discounting the cash flows to estimate the present value of assets and
liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which
theoretically approximates the fair value of the Company’s net assets.
Estimated Changes in Economic Value of Equity (EVE)
Change in interest rates
Policy Limit
December 31, 2020
December 31, 2019
35.0 %
2.7 %
10.6 %
25.0 %
3.8 %
8.6 %
+300 bp
+400 bp
+200 bp
+100 bp
-100 bp
-200 bp
-300 bp
-400 bp
17.0 %
5.0 %
6.7 %
12.0 %
3.0 %
5.0 %
12.0 %
(3.1) %
(15.1) %
17.0 %
4.1 %
(36.8) %
25.0 %
14.8 %
(44.1) %
35.0 %
20.0 %
(32.5) %
The EVE at risk in down rate scenarios increased at December 31, 2020, when compared to December 31, 2019. The increase in
economic value of equity in rising rate environments is largely attributable to the effect that an increase in interest rates has on the
present value of non-interest-bearing deposits. The discount rate for non-interest-bearing deposits rises as interest rates rise;
however, these deposits pay a rate of zero. The cost of these liabilities does not increase as interest rates rise, but the discount rate
56
applied to the expected future cash flows of these liabilities increases with interest rates. Any increase in the market rates used to
discount the cash flows of these liabilities reduces the present value of these liabilities. The decrease in present value of these
liabilities results in a net increase to economic value of equity. A falling rate environment would result in a higher net present
value for these liabilities and would lead to a net decrease to economic value of equity.
Additionally, interest-bearing deposits contribute to the large declines in economic value of equity in falling rate environments as
a result of their low cost. Interest-bearing deposit costs are modeled with a floor of zero, meaning that the interest rates paid on
deposits cannot be negative. In the event of a large downward interest rate shock, deposit costs would not move below zero.
However, the discount rates applied to the expected future cash flows of these deposits could sustain a large decline in interest
rates before reaching zero. This has the effect of increasing the present value of the interest-bearing-deposit liability and
ultimately decreasing economic value of equity.
The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy as well as
financial markets. The extent and magnitude of the economic slowdown occurring as a result of the COVID-19 pandemic is still
unknown. Financial markets adjusted dramatically to the reduced economic activity and the pace of recovery is uncertain. The
financial market benchmark most relevant to the Company’s current and future profitability is the United States Government
Treasury yield curve. The United States Government Treasury yield curve is used as a basis for the pricing of most bonds, loans,
borrowings, deposits and other fixed income yield curves. The United States Government Treasury yield curve has experienced a
large, relatively parallel, downward shift. Given the Company’s asset sensitive position, management expects that net interest
income will decline. As the outlook for the COVID-19 pandemic improves, management expects that the United States
Government Treasury curve will experience some degree of an upward shift over time.
Credit Risk
The Company has counter-party risk which may arise from the possible inability of third-party investors to meet the terms of their
forward sales contracts. The Company works with third-party investors that are generally well-capitalized, are investment grade
and exhibit strong financial performance to mitigate this risk. The Company monitors the financial condition of these third parties
on an annual basis and the Company does not expect these third parties to fail to meet their obligations.
Management expects that some clients will be unable to meet their financial obligations in the near-term as a result of the
decreased economic activity brought on by the COVID-19 pandemic. However, management does not expect that these credit
concerns will perpetuate indefinitely. Many clients may be eligible to defer loan payments to a later date. Management is working
to incorporate scenarios that reflect decreased loan cash flows in the short term into the Company’s interest rate risk models.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP, which generally
requires the measurement of financial position and operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased
cost of operations. Unlike industrial companies, the Company's assets and liabilities are primarily monetary in nature. As a result,
changes in market interest rates have a greater impact on performance than the effects of inflation.
57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
58
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of MVB Financial Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of MVB Financial Corp. and Subsidiaries (the
"Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive
income, changes in stockholders' equity, and cash flows, for each of the three years in the period ended December
31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020
and 2019, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2020, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 9, 2021 expressed an unqualified opinion
thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the
consolidated financial statements that were communicated or required to be communicated to the audit
committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements
and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we
are not, by communicating the critical audit matters below, providing separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
59
Allowance for Loan Losses
As described in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for loan losses
(“allowance”) balance was $25.8 million on gross loans of $1.45 billion as of December 31, 2020, and consisted
primarily of specific and general components. The specific component relates to loans that are impaired. The
general component covers all loans that are not impaired and is based upon historical loss experience adjusted for
qualitative factors. The amount of the allowance is based on management’s continuing evaluation of the risk
characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification
and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of non-
performing loans Certain qualitative factors are evaluated to determine additional inherent risks in the loan
portfolio, which are not necessarily reflected in the historical loss percentages. The allowance evaluation s
inherently subjective as it requires estimates that are susceptible to significant revision as more information
becomes available.
We identified the Company’s estimate of the allowance as a critical audit matter. The principal considerations for
our determination of the allowance as a critical audit matter included the degree of subjectivity and judgment
required to audit management’s identification of impaired loans and quantification of the related allowance, as
well as management’s selection of assumptions for the general component of the allowance. This was particularly
true for the assumptions that management utilized in determining and applying the qualitative factors in the
allowance model, as well as the level assigned by management for each qualitative factor.
The primary audit procedures we performed to address this critical audit matter included:
• We obtained an understanding of the Company’s process for establishing the allowance, including
understanding any changes that occurred within the model during 2020.
• We evaluated the design and tested the operating effectiveness of key controls relating to the Company’s
allowance, including controls over:
m The identification of impaired loans and resulting specific allowance, if necessary:
m The determination of qualitative factors; and
m
Management’s review and approval of the allowance model and resulting estimate, including the
qualitative components.
• We evaluated the reasonableness of management’s estimates and judgments related to the qualitative
factors and the resulting allocation to the allowance. This included evaluating the appropriateness of the
methodologies used by management to estimate the qualitative factor components of the allowance,
including evaluating the appropriateness and completeness of risk factors used in determining the qualitative
factors.
• We performed analytical procedures on the overall level and various components of the allowance, including
historical reserves, qualitative reserves and specific reserves, as well as credit quality to ensure movement in
a directionally consistent manner relative to credit quality indicators and changes in the Company’s loan
portfolio.
• We tested the completeness of impaired loans, including testing the modification for potential troubled debt
restructurings, substandard or worse rated loans, non-accrual loans, and past due loans.
• We tested the calculation of losses on a sample of impaired loans, including assessing the reasonableness of
the significant assumptions including any adjustments made to appraisals for discounts, selling costs, and
other unobservable adjustments.
Business Combinations – Fair Value of Acquired Loans
As described in Note 24, in April 2020 the Company completed its acquisition of certain assets and the assumption
of certain liabilities of The First State Bank, resulting in a bargain purchase gain of $4.7 million. The Company
accounted for this acquisition under the acquisition method of accounting, whereby the assets acquired and
liabilities assumed were recorded by the Company at fair value. Management made significant estimates and
60
exercised significant judgement in accounting for the acquisition of The First State Bank. In determining the fair
value of loans acquired, management segmented the loan portfolio based on whether or not acquired loans have
evidence of credit deterioration at acquisition (purchased credit impaired loans and purchased performing loans).
The valuation of the loans included an independent third party and took into consideration the loans' underlying
characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies,
timing of principal and interest payments, current market rates, loan to value ratios, loss exposures and remaining
balances.
We identified the Company’s estimate of the acquisition date fair value of acquired loans as a critical audit matter.
The principal considerations for that determination is the high degree of auditor judgement involved in evaluating
the probability of default and loss given default for loans identified with credit deterioration and the need for
specialized skill in development and application of subjective assumptions in estimated cash flows.
The primary audit procedures we performed to address this critical audit matter included the following:
• We evaluated the design and tested the operating effectiveness of controls relating the valuation of acquired
loans, including controls over:
m
m
The Company’s assumptions regarding specific credit losses of the acquired portfolio provided to the
independent third party;
Management’s review and approval of the significant assumptions utilized by the independent third
party; and
m Management’s review of the results of valuations provided by the independent third party.
• We tested the completeness and accuracy of loans determined to have credit deterioration at acquisition and
evaluated the reasonableness of the criteria utilized by management in the determination.
• We evaluated the significant assumptions and methods utilized in developing the fair value of the loan
portfolio, including assessment of significant assumptions, and evaluated whether the assumptions used were
reasonable.
• We involved the firm’s valuation specialists to assist in testing the Company’s calculation of fair value of the
loan portfolio acquired and certain significant assumptions, including among other assumptions, discount
rates, prepayment speeds, probability of defaults and loss given default, and foreclosure lags.
• We tested the completeness and accuracy of the data utilized in the fair value determination by the
independent third-party, including reconciling the loan portfolio to the loan trial balance, confirming a
sample of loans with the customer, and tracing select attributes from the loan system for a sample of loans to
the loan data utilized in the independent third-party valuation.
/s/ DIXON HUGHES GOODMAN LLP
We have served as the Company's auditor since 2014.
Tampa, Florida
March 9, 2021
61
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of MVB Financial Corp.
Opinion on Internal Control Over Financial Reporting
We have audited MVB Financial Corp. and Subsidiaries (the “Company”)’s internal control over financial reporting
as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,
based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2020 and
2019, and for each of the three years in the period ended December 31, 2020, and our report dated March, 9,
2021, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company's internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
As described in Management’s Annual Report on Internal Control over Financial Reporting, the scope of
management’s assessment of internal control over financial reporting as of December 31, 2020 has excluded The
First State Bank acquired on April 3, 2020. We have also excluded The First State Bank from the scope of our audit
of internal control over financial reporting. The First State Bank represented five percent of consolidated revenues
for the year ended December 31, 2020, and two percent of consolidated total assets as of December 31, 2020.
62
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ DIXON HUGHES GOODMAN LLP
Tampa, Florida
March 9, 2021
63
MVB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except per share data)
December 31, 2020 and 2019
ASSETS
Cash and cash equivalents:
Cash and due from banks
Interest-bearing balances with banks
Total cash and cash equivalents
Certificates of deposit with banks
Investment securities available-for-sale
Equity securities
Loans held-for-sale
Loans receivable
Allowance for loan losses
Loans receivable, net
Premises and equipment, net
Bank-owned life insurance
Equity method investment
Accrued interest receivable and other assets
Assets of branches held-for-sale
Goodwill
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Deposits of branches held-for-sale
Accrued interest payable and other liabilities
Repurchase agreements
FHLB and other borrowings
Subordinated debt
Total liabilities
2020
2019
$
$
19,110 $
244,783
263,893
11,803
410,624
27,585
1,062
18,430
9,572
28,002
12,549
235,821
18,514
109,788
1,453,744
(25,844)
1,427,900
26,203
41,262
46,494
72,300
—
2,350
2,331,476 $
1,374,541
(11,775)
1,362,766
21,974
35,374
—
53,142
46,554
19,630
1,944,114
$
715,791 $
1,266,598
1,982,389
—
55,931
10,266
—
43,407
2,091,993
278,547
986,495
1,265,042
188,270
41,685
10,172
222,885
4,124
1,732,178
STOCKHOLDERS’ EQUITY
Preferred stock - par value $1,000; 20,000 shares authorized; 733 shares issued and outstanding as of
December 31, 2020 and December 31, 2019
Common stock - par value $1; 20,000,000 shares authorized; 12,374,322 and 11,526,306 shares issued and
outstanding, respectively, as of December 31, 2020 and 11,995,366 and 11,944,289 shares issued and
outstanding, respectively, as of December 31, 2019
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock - 848,016 and 51,077 shares as of December 31, 2020 and December 31, 2019, respectively,
at cost
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
7,334
7,334
12,374
129,119
105,171
2,226
11,995
122,516
72,496
(1,321)
(16,741)
239,483
2,331,476 $
(1,084)
211,936
1,944,114
$
See Notes to Consolidated Financial Statements
64
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except per share data)
Years ended December 31, 2020, 2019 and 2018
INTEREST INCOME
Interest and fees on loans
Interest on deposits with banks
Interest on investment securities
Interest on tax-exempt loans and securities
Total interest income
INTEREST EXPENSE
Interest on deposits
Interest on short-term borrowings
Interest on subordinated debt
Total interest expense
NET INTEREST INCOME
Provision for loan losses
Net interest income after provision for loan losses
NONINTEREST INCOME
Mortgage fee income
Payment card and service charge income
Insurance and investment services income
Gain (loss) on sale of available-for-sale securities, net
Gain (loss) on sale of equity securities, net
Gain (loss) on derivatives, net
Holding gain on equity securities
Compliance consulting income
Equity method investment income
Gains on acquisition and divestiture activity
Other operating income
Total noninterest income
NONINTEREST EXPENSES
Salaries and employee benefits
Occupancy expense
Equipment depreciation and maintenance
Data processing and communications
Mortgage processing
Marketing, contributions and sponsorships
Professional fees
Insurance, tax and assessment expense
Travel, entertainment, dues and subscriptions
Other operating expenses
Total noninterest expense
Income from continuing operations, before income taxes
Income tax expense - continuing operations
Net income from continuing operations
Income from discontinued operations, before income taxes
Income tax expense - discontinued operations
Net income from discontinued operations
Net income
Preferred dividends
Net income available to common shareholders
Earnings per share from continuing operations - basic
Earnings per share from discontinued operations - basic
Earnings per common share - basic
Earnings per share from continuing operations - diluted
Earnings per share from discontinued operations - diluted
Earnings per common share - diluted
Weighted-average shares outstanding - basic
Weighted-average shares outstanding - diluted
2020
2019
2018
$
72,999 $
437
2,448
4,569
80,453
74,854 $
489
3,055
3,963
82,361
10,294
1,072
261
11,627
68,826
16,579
52,247
33,427
2,821
872
914
3,501
2,341
374
4,436
24,174
17,640
1,337
91,837
61,629
4,599
3,672
5,375
1,744
1,096
8,453
2,090
3,390
5,093
97,141
46,943
9,532
37,411
—
—
—
37,411 $
461
36,950 $
3.13 $
— $
3.13 $
3.06 $
— $
3.06 $
17,439
4,752
770
22,961
59,400
1,789
57,611
41,045
1,980
727
(166)
(7)
1,253
13,767
921
—
—
5,084
64,604
56,175
4,816
3,640
4,025
3,041
1,290
4,999
1,663
4,151
3,401
87,201
35,014
8,450
26,564
575
148
427
26,991 $
479
26,512 $
2.22 $
0.04 $
2.26 $
2.16 $
0.04 $
2.20 $
11,821,574
12,088,106
11,713,885
12,044,667
$
$
$
$
$
$
$
$
62,468
403
3,580
3,309
69,760
11,635
4,315
1,756
17,706
52,054
2,440
49,614
32,337
1,680
716
327
—
(278)
590
—
—
—
3,268
38,640
46,224
4,234
3,239
3,741
3,551
1,141
3,559
1,846
2,808
2,535
72,878
15,376
3,373
12,003
—
—
—
12,003
489
11,514
1.04
—
1.04
1.00
—
1.00
11,030,984
12,722,003
See Notes to Consolidated Financial Statements
65
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Years ended December 31, 2020, 2019 and 2018
Net income
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available-for-sale
Income tax effect
Reclassification adjustment for (gain) loss recognized in income
Income tax effect
Change in defined benefit pension plan
Income tax effect
Reclassification adjustment for amortization of net actuarial loss recognized in income
Income tax effect
Reclassification adjustment for carrying value adjustment - investment hedge recognized in income
Income tax effect
2020
2019
$ 37,411 $ 26,991 $ 12,003
2018
6,979
(1,635)
8,498
(2,294)
(4,167)
1,125
(914)
214
166
(44)
(327)
88
(1,403)
329
(1,467)
396
420
(98)
(473)
128
271
(73)
44
(12)
(22)
6
306
(83)
—
—
Total other comprehensive income (loss)
3,547
5,485
(3,074)
Comprehensive income
$ 40,958 $ 32,476 $
8,929
See Notes to Consolidated Financial Statements
66
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands except per share data)
Years ended December 31, 2020, 2019 and 2018
Preferred stock
Common stock
Shares Amount
Shares
Amount
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Treasury stock
Shares Amount
Total
stockholders'
equity
Balance as of January 1, 2018
783 $ 7,834
10,495,704 $ 10,496 $
98,698 $ 37,236 $
(2,988)
51,077 $ (1,084) $
150,192
Net income
Other comprehensive loss
Cash dividends paid ($0.11 per
share)
Dividends on preferred stock
Stock-based compensation
Common stock options exercised
Restricted stock units vested
Stranded AOCI
Mark-to-market on equity
positions
Common stock issued from
subordinated debt conversion, net
of costs
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
162,666
161
—
—
—
1
—
—
—
—
—
—
1,267
1,968
(1)
—
—
12,003
—
(1,220)
(489)
—
—
—
646
98
—
(3,074)
—
—
—
—
—
(646)
(98)
—
1,000,000
1,000
14,965
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12,003
(3,074)
(1,220)
(489)
1,267
2,129
—
—
—
15,965
Balance as of December 31, 2018
783
7,834
11,658,370
11,658
116,897
48,274
(6,806)
51,077
(1,084)
176,773
Net income
Other comprehensive income
Cash dividends paid ($0.195 per
share)
Dividends on preferred stock
Stock-based compensation
Common stock options exercised
Restricted stock units vested
Common stock issued from
subordinated debt conversion, net
of costs
Common stock issued related to
Chartwell acquisition
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
210,050
9,576
62,500
54,870
Redemption of preferred stock
(50)
(500)
—
—
—
—
—
—
210
10
62
55
—
—
—
—
—
1,759
1,954
(10)
938
978
—
26,991
—
(2,290)
(479)
—
—
—
—
—
—
—
5,485
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26,991
5,485
(2,290)
(479)
1,759
2,164
—
1,000
1,033
(500)
Balance as of December 31, 2019
733
7,334
11,995,366
11,995
122,516
72,496
(1,321)
51,077
(1,084)
211,936
Net income
Other comprehensive income
Cash dividends paid ($0.36 per
share)
Dividends on preferred stock
Stock-based compensation
Common stock options exercised
Restricted stock units vested
Common stock repurchased
Common stock issued related to
Paladin acquisition
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
305,697
306
53,981
—
19,278
54
—
19
—
—
—
—
2,353
4,153
(124)
—
221
37,411
—
(4,275)
(461)
—
—
—
—
—
—
3,547
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
525
(7)
37,411
3,547
(4,275)
(461)
2,353
4,459
(77)
796,414
(15,650)
(15,650)
—
—
240
Balance as of December 31, 2020
733 $ 7,334
12,374,322 $ 12,374 $ 129,119 $ 105,171 $
2,226
848,016 $ (16,741) $
239,483
See Notes to Consolidated Financial Statements
67
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31, 2020, 2019 and 2018
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash from operating activities:
Net amortization and accretion of investments
Net amortization of deferred loan (fees) costs
Provision for loan losses
Depreciation and amortization
Stock-based compensation
Loans originated for sale
Proceeds of loans sold
Holding gain on equity securities
Mortgage fee income
Gain on sale of available-for-sale securities
Loss on sale of available-for-sale securities
Gain on sale of equity securities
Loss on sale of equity securities
Gain on sale of portfolio loans
Gains on acquisition and divestiture activity
Income on bank-owned life insurance, including death benefit proceeds in excess of cash surrender value
Deferred taxes
Amortization of operating lease right-of-use asset
Equity method investment income
Return on equity method investment
Other assets
Other liabilities
Net cash from operating activities
INVESTING ACTIVITIES
Purchases of investment securities available-for-sale
Maturities/paydowns of investment securities available-for-sale
Sales of investment securities available-for-sale
Purchases of premises and equipment, including premises and equipment included in assets of branches held-for-sale
Disposals of premises and equipment
Net increase in loans and loans included in assets of branches held-for-sale
Purchases of restricted bank stock
Redemptions of restricted bank stock
Proceeds from sale of certificates of deposit with banks
Purchases of certificates of deposit with banks
Proceeds from sale of other real estate owned
Purchase of bank-owned life insurance
Proceeds from death benefit of bank-owned life insurance policies
Purchase of equity securities
Sales of equity securities
Proceeds from divestitures
Cash paid for acquisitions
Net cash from investing activities
FINANCING ACTIVITIES
Net increase in deposits and deposits in branches held-for-sale
Net change in repurchase agreements
Net change in FHLB and other borrowings
Subordinated debt issuance (redemption)
Subordinated debt issuance and conversion costs
Common stock repurchased
Preferred stock redemption
Common stock options exercised
Cash dividends paid on common stock
Cash dividends paid on preferred stock
Net cash from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
68
2020
2019
2018
$
37,411 $
26,991 $
12,003
1,892
1,692
16,579
3,292
2,353
(1,334,910)
1,477,063
(374)
(33,427)
(948)
34
(3,501)
—
(332)
(17,640)
(888)
(3,386)
86
(27,574)
3,400
(27,286)
18,699
112,235
1,258
(448)
1,789
3,260
1,759
(1,604,825)
1,611,889
(13,767)
(41,045)
(105)
271
—
7
(520)
—
(1,197)
(3,953)
10
—
—
(14,753)
25,317
(8,062)
1,293
(324)
2,440
2,938
1,267
(1,214,078)
1,237,402
(590)
(32,337)
(352)
25
—
—
(198)
—
(1,182)
139
—
—
—
(3,013)
1,261
6,694
(269,790)
64,493
54,023
(6,615)
1,687
(70,186)
(25,831)
38,048
1,739
(993)
8,309
(5,000)
—
(9,918)
4,622
(136,005)
57,306
(294,111)
(70,984)
33,583
31,220
(2,042)
—
(113,076)
(49,600)
45,853
2,229
—
731
(574)
688
(1,400)
5,968
—
(2,651)
(120,055)
574,691
94
(180,283)
40,000
(717)
(15,746)
—
4,464
(4,275)
(461)
417,767
235,891
28,002
$ 263,893 $
144,158
(4,753)
7,998
(12,400)
—
—
(500)
2,164
(2,290)
(479)
133,898
5,781
22,221
28,002 $
(31,068)
25,748
2,743
(2,693)
—
(199,282)
(29,370)
25,681
—
—
707
(1,149)
706
(2,000)
—
—
—
(209,977)
149,574
(7,478)
62,718
—
(35)
—
—
2,129
(1,220)
(489)
205,199
1,916
20,305
22,221
Business combination non-cash disclosures:
Assets acquired in business combinations (net of cash received)
Liabilities assumed in business combination
Supplemental disclosure of cash flow information:
Loans transferred to other real estate owned
Employee stock-based compensation tax withholding obligations
Restricted stock units vested
Common stock converted from subordinated debt
Initial recognition of operating lease right-of-use assets
Initial recognition of operating lease liabilities
Common stock issued related to Paladin acquisition
Cash payments for:
Interest on deposits, repurchase agreements and borrowings
Income taxes
$
$
87,722 $
148,731
3,389 $
855
—
—
800 $
35
49
—
—
—
240
115 $
57
10
1,000
12,935
15,659
—
1,369
161
1
15,965
—
—
—
$
12,271 $
11,966
22,970 $
3,962
17,277
191
See Notes to Consolidated Financial Statements
69
Note 1 – Summary of Significant Accounting Policies
Business and Organization
The Company is a financial holding company and was organized as a West Virginia corporation in 2003. MVB operates
principally through its wholly-owned subsidiary, the Bank. The Bank’s subsidiaries include MVB Insurance, MVB CDC,
Chartwell, Paladin Fraud and MVB Technology.
MVB conducts a wide range of business activities, primarily CoRe banking. The Company also continues to be involved in new
innovative strategies to provide independent banking to corporate clients throughout the United States by leveraging recent
investments in Fintech. MVB considers Fintech companies as those entities that use technology to electronically move funds.
Since the formation of the Bank, the Company has acquired a number of financial institutions and other financial services
businesses. Future acquisitions and divestitures will be consistent with the Company’s strategic direction. The Company's most
recent acquisition and divestiture activity includes the following:
l In September 2019, the Company acquired Chartwell, based from Bethesda, MD. Chartwell provides integrated regulatory
compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting,
outsourcing, testing and training solutions. Chartwell has expanded its services to both Fintech clients and banks, in
coordination with MVB Bank’s current compliance officers, to help create and implement strategy and provide expert
compliance resources with respect to new client due diligence.
l In November 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc.
(“Summit”), a subsidiary of Summit Financial Group, Inc., pursuant to which Summit purchased certain assets and assumed
certain liabilities of three Bank branch locations in Berkeley County, WV, and one Bank branch location in Jefferson County,
WV. The Company closed this transaction in April 2020.
l In March 2020, the Bank entered into an Agreement with Intercoastal Mortgage Company, a Virginia corporation
(“Intercoastal”), and each of H. Edward Dean, III, Tom Pyne and Peter Cameron, providing for the combination of the Bank's
mortgage origination services and Intercoastal. The transaction closed in July 2020. On the closing date, Intercoastal
converted into a Virginia limited liability company and the Bank contributed certain of its assets and liabilities associated with
its mortgage operations to Intercoastal as a capital contribution, in exchange for common units of a new entity, ICM,
representing 47% of the common interest of ICM, as well as $7.5 million in preferred units. The Company recognizes its
ownership interest in ICM as an equity method investment.
l In April 2020, the Bank entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation
(“FDIC”), as receiver for The First State Bank, Barboursville, WV, providing for the assumption by the Bank of certain
liabilities and the purchase by the Bank of certain assets of First State. First State depositors automatically became depositors
of the Bank and, subject to the insurance limitations, deposits will continue to be insured by the FDIC without interruption. In
the Agreement, the Bank agreed to pay no deposit premium and to acquire the assets at a discount to book value. The Bank
also acquired three branch locations in Barboursville, Teays Valley and Huntington, WV.
l In April 2020, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin, LLC, a Washington
limited liability company.
l In August 2020, MVB Technology entered into an Asset Purchase Agreement with Invest Forward, Inc., a Delaware
corporation doing business as Grand. Pursuant to the Asset Purchase Agreement, MVB Technology acquired substantially all
the assets of Grand. The purchase price of the transaction consisted of cash totaling $1.0 million, plus the conversion of
MVB’s note with Invest Forward.
Business Overview
Commercial and Retail Banking
The Company’s primary business activities, which are conducted through the Bank and its subsidiaries, are primarily CoRe
banking. The Bank offers its customers a full range of products and services including:
l Various demand deposit accounts, savings accounts, money market accounts and certificates of deposit;
70
l Commercial, consumer and real estate mortgage loans and lines of credit;
l Debit cards;
l Cashier’s checks;
l Safe deposit rental facilities; and
l Non-deposit investment services offered through an association with a broker-dealer.
Fintech Banking
In addition to its CoRe banking activities, the Company is also involved in innovative strategies to provide independent banking
to corporate clients throughout the United States by leveraging recent investments in Fintech. The dedicated Fintech sales team
specializes in providing banking services to corporate Fintech clients, with an overarching focus on operational risk and
compliance. Managing banking relationships with clients in the payments, digital savings, cryptocurrency, crowd funding, lottery
and gaming industries is complex from both an operational and regulatory perspective.
COVID-19 Pandemic
During 2020, economies throughout the world have been severely disrupted as a result of the outbreak of COVID-19. The
outbreak and any preventative or protective actions that the Company or its clients may take in respect of this virus may result in a
period of disruption, including the Company’s financial reporting capabilities, its operations generally and could potentially
impact the Company’s clients, providers and third parties. The extent to which the COVID-19 pandemic impacts the Company’s
future operating results will depend on future developments, which are highly uncertain and cannot be predicted.
Basis of Presentation
The financial statements are consolidated to include the accounts of the Company, its subsidiary, MVB Bank and the Bank’s
wholly-owned subsidiaries. These statements have been prepared in accordance with U.S. GAAP and practices in the banking
industry. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements.
In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses for the period. Estimates are based on known facts and circumstances and actual
results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change
relate to determination of the allowance for loan losses, purchased credit impaired loans, derivative instruments, goodwill and
deferred tax assets and liabilities.
Unconsolidated investments where the Company has the ability to exercise significant influence over the operating and financial
policies of the respective investee are accounted for using the equity method of accounting; those that are not consolidated or
accounted for using the equity method of accounting are accounted for under cost or fair value accounting. For these investments
accounted for under the equity method, the Company records its investment in non-consolidated affiliates and the portion of
income or loss in equity in earnings of non-consolidated affiliates. The Company periodically evaluates these investments for
impairment. As of December 31, 2020, the Company holds one equity method investment.
Certain amounts in the 2019 and 2018 consolidated financial statements have been reclassified to conform to the 2020 financial
statement presentation and there was no change to net income.
The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated
financial statements were issued.
Cash and Cash Equivalents
Cash equivalents include cash on hand, deposits in banks and interest-earning deposits. Interest-earning deposits with original
maturities of 90 days or less are considered cash equivalents. Net cash flows are reported for loans, deposits and short-term
borrowing transactions.
71
Investment Securities
Investment securities at the time of purchase are classified as one of the following:
Available-for-Sale Securities - Includes debt that will be held for indefinite periods of time. These securities may be sold in
response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and yield of
alternative investments. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings
and reported as a separate component of stockholders’ equity, net of estimated income tax effect.
Equity Securities - Includes equity securities that are adjusted to fair value on a monthly basis, with the change in value recorded
directly on the income statement. The Company has elected to measure the equity securities without readily determinable fair
values at cost minus impairment, if any, plus or minus changes resulting from observable price changes for underlying
transactions for identical or similar investments of new issues.
The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed
by a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific
identification of the adjusted cost of each security.
Securities are periodically reviewed for other-than-temporary impairment. For debt securities, management considers whether the
present value of future cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined
as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell
the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated
recovery in market value, to determine whether the loss in value is other than temporary. If a decline in value is determined to be
other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required
to sell the security before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit
loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is
recognized in other comprehensive income, net of applicable taxes. A decline in value that is considered to be other-than-
temporary is recorded as a loss within noninterest income in the consolidated statement of income.
The Bank is a member of the FHLB of Pittsburgh and as such, is required to maintain a minimum investment in stock of the
FHLB that varies with the level of advances outstanding with the FHLB. As of December 31, 2020 and 2019, the Bank holds $2.8
million and $15.0 million, respectively, which is included in accrued interest receivable and other assets. The stock is bought from
and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and as such is
classified as restricted stock, carried at cost and evaluated by management. The stock’s value is determined by the ultimate
recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will
ultimately be recovered is influenced by criteria such as the following: (a) a significant decline in net assets of the FHLB as
compared to the capital stock amount and the length of time this situation has persisted; (b) commitments by the FHLB to make
payments required by law or regulation and the level of such payments in relation to the operating performance; (c) the impact of
legislative and regulatory changes on the customer base of the FHLB; and (d) the liquidity position of the FHLB. Management
evaluated the stock and concluded that the stock was not impaired for the periods presented herein.
Management considered that the FHLB’s regulatory capital ratios have improved in the most recent quarters, liquidity appears
adequate, new shares of FHLB stock continue to exchange hands at the $100 par value and the FHLB has repurchased shares of
excess capital stock from its members during 2020 and 2019.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal reduced by an allowance for loan losses. Loans are considered non-accrual
when scheduled principal or interest payments are 90 days past due. Interest income on loans is recognized on an accrual basis.
The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses inherent in the loan portfolio.
The Company consistently applies a quarterly loan review process to continually evaluate loans for changes in credit risk. This
process serves as the primary means by which the Company evaluates the adequacy of the allowance for loan losses, and is based
upon periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as
more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are impaired. The
72
general component covers all loans that are not impaired, and is based upon historical loss experience adjusted for qualitative
factors.
The Company allocates the allowance based on the factors described below, which conform to the Company’s loan classification
policy. In reviewing risk within the loan portfolio, management has determined there to be several different risk categories within
the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) residential real estate loans; (ii) commercial
and commercial real estate secured loans; (iii) home equity loans; and (iv) consumer and other loans. Factors considered in this
process include general loan terms, collateral and availability of historical data to support the analysis. Historical loss percentages
for each loan category are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are
evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss
percentages. These factors are then added to the historical allocation percentages to get the adjusted factor to be applied to non-
classified loans on a weighted basis, by risk grade. The following qualitative factors are analyzed:
l Lending policies and procedures
l Nature and volume of the portfolio
l Experience and ability of lending management and staff
l Volume and severity of problem credits
l Quality of the loan review system
l Conclusions of loan reviews, audits and exams
l National, state, regional and local economic trends and business conditions
l General economic conditions
l Unemployment rates
l Inflation / Consumer Price Index
l Value of underlying collateral
l Existence and effect of any credit concentrations
l Consumer sentiment
l Other external factors
The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.
A loan that has deteriorated and requires additional collection efforts by the Bank could warrant non-accrual status. A thorough
review is presented to the Chief Credit Officer and/or the Special Assets Review Committee (“SARC”), as required with respect
to any loan which is in a collection process and to make a determination as to whether the loan should be placed on non-accrual
status. The placement of loans on non-accrual status is subject to applicable regulatory restrictions and guidelines. Generally,
loans should be placed in non-accrual status when the loan reaches 90 days past due, when it becomes likely the borrower cannot
or will not make scheduled principal or interest payments, when full repayment of principal and interest is not expected, or when
the loan displays potential loss characteristics. Normally, all accrued interest is charged off when a loan is placed in non-accrual
status, unless Management believes it is likely the accrued interest will be collected. Any payments subsequently received are
applied to principal. To remove a loan from non-accrual status, all principal and interest due must be paid up to date and the Bank
is reasonably sure of future satisfactory payment performance. Usually, this requires a six-month recent history of payments due.
Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and/or SARC.
Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in evaluating impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when due. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the
amount of the shortfall in relation to the principal and interest owed. The Company also separately evaluates individual consumer
loans for impairment. Loans are identified individually by monitoring the delinquency status of the Bank’s portfolio. Once
identified, the Bank’s ongoing communications with the borrower allow evaluation of the significance of the payment delays and
the circumstances surrounding the loan and the borrower.
Once the determination has been made that a loan is impaired, the amount of the impairment is measured using one of three
valuation methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the
loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan
73
basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a
specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.
The Company defers loan origination and commitment fees and direct loan origination costs and the net amount is amortized as
an adjustment of the related loan’s yield.
Purchased Credit Impaired Loans
The Company may purchase individual loans and groups of loans, some of which have shown evidence of credit deterioration
since origination. These PCI loans are recorded at the amount paid, such that there is no carryover of the seller's allowance for
loan losses.
After acquisition, losses are recognized by an increase in the allowance for loan losses. Such PCI loans are accounted for
individually or aggregated into pools of loans based on common risk characteristics, such as credit score, loan type and date of
origination. The Company estimates the amount and timing of expected cash flows for each loan or pool and the expected cash
flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The
excess of the loan's or pool's contractual principal and interest over expected cash flows is not recorded (non-accretable
difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less
than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater
than the carrying amount, it is recognized as part of future interest income.
Troubled Debt Restructurings
A restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor for economic or legal reasons related to
the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Concessions may include
interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other
actions intended to minimize potential losses. The determination of whether a concession has been granted includes an evaluation
of the debtor’s ability to access funds at a market rate for debt with similar risk characteristics and among other things, the
significance of the modification relative to unpaid principal or collateral value of the debt and/or the significance of a delay in the
timing of payments relative to the frequency of payments, original maturity date or the expected duration of the loan. The most
common concessions granted generally include one or more modifications to the terms of the debt such as a reduction in the
interest rate for the remaining life of the debt, an extension of the maturity date at an interest rate lower than the current market
rate for new debt with similar risk, or reduction of the unpaid principal or interest. All TDRs are considered impaired loans.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation, while land is carried at cost. Depreciation expense is
computed for financial reporting by the straight-line-method based on the estimated useful lives of assets, which range from seven
to 40 years on buildings, three to ten years on furniture, fixtures and equipment, and lesser of useful life or lease term for
leasehold improvements.
Bank-Owned Life Insurance
Bank-owned life insurance represents life insurance on the lives of certain Company employees who have provided positive
consent allowing the Company to be the beneficiary of such policies. These policies are recorded at their cash surrender value or
the amount that can be realized upon surrender of the policy. Income from these policies is not subject to income taxes and is
recorded as noninterest income.
Equity Method Investment
Investments in companies in which the Company has significant influence over the operating and financing decisions are
accounted for using the equity method of accounting. These investments are included in the equity method investment line item
on the consolidated balance sheets. The Company recognizes its proportionate share of the investee's profits and losses in the
equity method investment income line item with corresponding adjustments to the equity method investment line item.
74
Intangible Assets and Goodwill
Goodwill is reviewed for potential impairment at least annually at the reporting unit level. In addition to the annual impairment
evaluation, the Company evaluates for impairment when events or circumstances indicate that it is more likely than not an
impairment loss has occurred. The Company performs its annual impairment test during the fourth quarter. The Company first
assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test discussed
below. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount, including goodwill. Examples of qualitative factors include: economic conditions; industry
and market considerations; increases in labor or other costs; overall financial performance such as negative or declining cash
flows; relevant entity-specific events such as changes in management, key personnel, strategy or customers; and regulatory or
political developments.
The Company early adopted ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. Topic 350, Intangibles—Goodwill and Other (Topic 350) and did so for the period ended December 31, 2020. This
guidance simplified the accounting for goodwill impairment for all entities by requiring impairment charges to be based on Step 1
of the previous accounting guidance’s two-step impairment test under ASC Topic 350. Under the new guidance, if a reporting
unit’s carrying amount exceeds its fair value, the entity will record an impairment charge based on that difference. The
impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The new standard eliminates the
requirement to calculate a goodwill impairment charge using Step 2, which involved calculating an implied fair value of goodwill
for each reporting unit for which the first step indicated impairment. The standard does not change the guidance on completing
Step 1 of the goodwill impairment test. Entities are still be able to perform optional qualitative goodwill impairment assessment
before determining whether to proceed to the quantitative step of determining whether the reporting unit’s carrying amount
exceeds it fair value.
For intangible assets subject to amortization, the recoverability test is performed when a triggering event occurs and an
impairment loss is recognized if the carrying value of the intangible asset exceeds fair value and is not recoverable. The carrying
value of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result
from the use of the asset. Intangible assets deemed to have indefinite useful lives are not subject to amortization. An impairment
loss is recognized if the carrying value of the intangible asset with an indefinite life exceeds its fair value.
Derivative Instruments
Interest Rate Lock Commitments and Hedges
The Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to
funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be
derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 30
days to 120 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery
commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent
that the buyer has assumed interest rate risk on the loan. The correlation between the rate lock commitments and hedges is very
high due to their similarity. As a result of these strategies, the Company limits the exposure of losses with these arrangements and
will not realize significant gains related to its rate lock commitments due to changes in interest rates. For loans not originated on a
best effort basis, the Company also uses mortgage-backed security hedges and pair-offs to mitigate interest rate risk by entering
into securities and mortgage-backed securities trades with brokers.
The fair value of rate lock commitments and hedges is not readily ascertainable with precision because rate lock commitments and
hedges are not actively traded in stand-alone-markets. The Company determines the fair value of rate lock commitments and
hedges by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate
lock commitments will close. Fair value changes are recorded in noninterest income in the Company’s consolidated statement of
income. At December 31, 2020 and 2019, the balance of interest rate lock commitments was $0 and $1.7 million, respectively.
There were no forward sales commitments as of December 31, 2020 and 2019.
Interest Rate Swaps
Beginning in 2015, the Company entered into interest rate swap agreements to facilitate the risk management strategies of a small
number of commercial banking clients. The Company mitigates this risk by entering into equal and offsetting interest rate swap
agreements with highly rated third-party financial institutions. The interest rate swap agreements are free-standing derivatives and
75
are recorded at fair value on the Company’s consolidated balance sheet. Fair value changes are recorded in noninterest income in
the Company’s consolidated net income statement. At December 31, 2020 and 2019, the fair value of interest rate swap
agreements was $13.8 million and $5.7 million, respectively.
Fair Value Hedge
The Company entered into an interest rate swap designated as a fair value hedge to mitigate the effect of changing interest rates
on the fair values of certain designated fixed-rate loans and available for sale securities. This involves the receipt of variable
amounts from a counterparty in exchange for the Company making fixed payments over the life of the agreements without the
exchange of the underlying notional amount. The gain or loss on the derivative as well as the offsetting gain or loss on
the hedged item attributable to the hedged risk are recognized in earnings. The Company entered into a pay-fixed/receive-variable
interest rate swap in January 2019 with a notional amount of $23.0 million and $30.0 million at December 31, 2020 and 2019,
respectively, which was designated as a fair value hedge associated with the Company’s fixed-rate loan program and certain
available for sale securities. At December 31, 2020 and 2019, the fair value of interest rate swap hedge was $0.1 million and $0.4
million, respectively.
Mortgage Servicing Rights
Mortgage servicing rights (“MSRs”) are recorded when the Bank sells mortgage loans and retains the servicing on those loans. On
a monthly basis, MVB tracks the amount of mortgage loans that are sold with servicing retained. A valuation is done to determine
the MSRs value, which is then recorded as an asset and amortized over the period of estimated net servicing revenues. The
balance of MSRs is evaluated for impairment quarterly, and was determined not to be impaired at December 31, 2020 or 2019.
Servicing loans for others generally consists of collecting mortgage payments from borrowers, maintaining escrow accounts,
remitting payments to third party investors and, when necessary, foreclosure processing. Serviced loans are not included in the
Consolidated Balance Sheets. At December 31, 2020 and 2019, the value of MSRs was $2.9 million and $0.3 million,
respectively.
Foreclosed Assets Held for Resale
Foreclosed assets held for resale acquired in satisfaction of mortgage obligations and in foreclosure proceedings are recorded at
fair value less estimated selling costs at the time of foreclosure, establishing a new cost basis, with any valuation adjustments
charged to the allowance for loan losses. In subsequent periods, foreclosed assets are recorded at the lower of cost or fair value
less any costs to sell. Costs relating to improvement of the property are capitalized, while holding costs of the property are
charged to other loan origination and maintenance expense in the period incurred. Subsequent declines in fair value and gains or
losses on sale are recorded in other noninterest expense. At December 31, 2020 and 2019, the Company held other real estate of
$5.7 million and $1.4 million, respectively. These amounts include the foreclosed assets that were acquired from our acquisition
of First State.
Fair Value Measurements
Accounting standards require that the Company adopt fair value measurement for financial assets and financial liabilities. This
enhanced guidance for using fair value to measure assets and liabilities applies whenever other standards require or permit assets
or liabilities to be measured at fair value. This guidance does not expand the use of fair value in any new circumstances.
The following summarizes the methods and significant assumptions used by the Company in estimating its fair value disclosures
for financial instruments.
Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of
the reported date. The nature of these assets and liabilities include items for which quoted prices are available, but
traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be
directly observed.
Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-
way markets and are measured using management’s best estimate of fair value, where the inputs into the
determination of fair value require significant management judgment or estimation.
76
Transfers of assets and liabilities between levels within the fair value hierarchy are recognized when an event or change in
circumstances occurs.
Revenue Recognition
The Company records revenue from contracts with customers in accordance with ASU 2014-09, Revenue from Contracts with
Customers (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance
obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the
contract and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been
recognized in the current reporting period that results from performance obligations satisfied in previous periods.
The Company’s primary sources of revenue are derived from interest and fees earned on loans, investment securities and other
financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with
customers and determined that further disaggregation of revenue from contracts with customers into more granular categories
beyond what is presented in the Consolidated Statements of Income is not currently necessary. The Company generally fully
satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are
typically fixed, charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services
are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects
the determination of the amount and timing of revenue from contracts with customers.
Payment Card and Service Charge Income
Payment card and service charge income are comprised of service charges on accounts and interchange and debit card transaction
fees. Service charges on accounts consist of account analysis fees, monthly service fees, check orders and other account related
fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied and the
related revenue recognized, over the period in which the service is provided. Check orders and other account related fees are
largely transactional based and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at a
point in time. Payment for service charges on accounts is primarily received immediately or in the following month through a
direct charge to customers’ accounts.
Interchange and debit card transaction fees are primarily comprised of interchange fees earned whenever the Bank’s debit and
credit cards are processed through card payment networks, such as Visa. The Bank’s performance obligation for debit card and
interchange income is generally satisfied, and the related revenue recognized, on a transactional basis. Payment is typically
received immediately or in the following month. The Company also enters into interchange arrangements with minimum
commitment fees. Minimum commitment fees are recognized ratably, until such time that minimum commitment fees are
exceeded or expected to be exceeded.
Compliance Consulting Income
Compliance consulting income is comprised of consulting revenue generated by Chartwell and Paladin Fraud. Chartwell provides
integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services that
include consulting, outsourcing, testing and training solutions. Paladin Fraud provides an extensive and customizable suite of
fraud prevention services for merchants, credit agencies, Fintech companies and other vendors to help clients and partners defend
against threats. Chartwell and Paladin Fraud account for a contract after it has been approved by all parties to the arrangement, the
rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of
consideration is probable. The services promised are then evaluated in each contract at inception to determine whether the
contract should be accounted for as having one or more performance obligations. Both Chartwell and Paladin Fraud's services
included in its contracts are distinct from one another. The transaction price for each contract is determined based upon the
consideration expected to be received for the distinct services being provided under the contract. Revenue is recognized as
performance obligations are satisfied and the customer obtains control of the goods or services provided. In determining when
performance obligations are satisfied, factors considered include contract terms, payment terms and whether there is an alternative
future use of the product or service. Consulting engagements may vary in length and scope but will generally include the review
and/or preparation of regulatory filings, business plans, financial models and other risk management services to customers within
financial industries. Revenue from consulting services is recognized upon completion of deliverables as outlined in the consulting
agreement.
77
Other Operating Income
Other operating income is primarily comprised of ATM fees, wire transfer fees, travelers check fees, revenue streams such as safe
deposit box rental fees and other miscellaneous service charges. ATM fees, wire transfer fees and travelers check fees are
primarily generated when a Bank’s cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Safe deposit
box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Bank determined that
since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the
performance obligation. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks
and other services. The Bank’s performance obligations for fees and other service charges are largely satisfied, and related
revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the
following month. The Bank’s performance obligation for the gains and losses on sales of other real estate owned is satisfied, and
the related revenue recognized, after each sale of other real estate owned is closed.
Marketing Costs
Marketing costs are expensed as incurred. Marketing expense was $1.1 million, $1.3 million and $1.1 million for 2020, 2019 and
2018, respectively.
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock units (“RSUs”) issued to employees, based on the fair
value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options.
Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded
vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Earnings Per Share
The Company determines basic earnings per share by dividing net income less preferred stock dividends by the weighted-average
number of common shares outstanding during the period. Diluted earnings per share is determined by dividing net income less
dividends on convertible preferred stock plus interest on convertible subordinated debt by the weighted-average number of shares
outstanding, increased by both the number of shares that would be issued assuming the exercise of stock options under the
Company’s 2003 and 2013 Stock Incentive Plans and the conversion of preferred stock and subordinated debt, if dilutive.
78
(Dollars in thousands except shares and per share data)
Numerator for basic earnings per share:
Net income from continuing operations
Less: Dividends on preferred stock
Net income from continuing operations available to common shareholders - basic
Net income from discontinued operations available to common shareholders - basic and
diluted
Net income available to common shareholders
Numerator for diluted earnings per share:
Net income from continuing operations available to common shareholders - basic
Add: Dividends on preferred stock
Add: Interest on subordinated debt (tax effected)
Net income available to common shareholders from continuing operations - diluted
Denominator:
Total average shares outstanding
Effect of dilutive convertible preferred stock
Effect of dilutive convertible subordinated debt
Effect of dilutive stock options and restricted stock units
Total diluted average shares outstanding
Earnings per share from continuing operations - basic
Earnings per share from discontinued operations - basic
Earnings per common share - basic
Earnings per share from continuing operations - diluted
Earnings per share from discontinued operations - diluted
Earnings per common share - diluted
For the years ended
December 31,
2020
2019
2018
37,411 $
461
36,950
26,564 $
479
26,085
12,003
489
11,514
—
36,950 $
427
26,512 $
—
11,514
36,950 $
—
—
36,950 $
26,085 $
—
—
26,085 $
11,514
489
753
12,756
$
$
$
$
11,821,574
—
—
266,532
12,088,106
11,713,885
—
—
330,782
12,044,667
11,030,984
489,625
837,500
363,894
12,722,003
$
$
$
$
$
$
3.13 $
— $
3.13 $
3.06 $
— $
3.06 $
2.22 $
0.04 $
2.26 $
2.16 $
0.04 $
2.20 $
1.04
—
1.04
1.00
—
1.00
For the years ended December 31, 2020, 2019, and 2018, approximately 0.5 million, 0.4 million and 0.3 million options to
purchase shares of common stock, respectively, were not included in the computation of diluted earnings per share because the
effect would be antidilutive.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and minimum pension
liability, are reported as a separate component of the equity section of the Consolidated Balance Sheet, such items, along with net
income, are components of comprehensive income.
In 2018, the Company was required to perform a reclassification from AOCI to retained earnings for stranded tax effects resulting
from the newly enacted federal corporate income tax rate in the Tax Reform Act. The Tax Reform Act included a reduction to the
corporate income tax rate from 34 percent to 21 percent effective January 1, 2018. The amount of the reclassification is the
difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate, which
resulted in a decrease of $0.6 million.
Income Taxes
The amount reflected as income taxes represents federal and state income taxes on financial statement income. Certain items of
income and expense, primarily the provision for possible loan losses, allowance for losses on foreclosed assets held for resale,
depreciation and accretion of discounts on investment securities are reported in different accounting periods for income tax
purposes. The Company and the Bank file a consolidated federal income tax return. Deferred tax assets and liabilities are
computed based on the difference between the financial statement basis and income tax bases of assets and liabilities using the
79
enacted marginal tax rates. Deferred income tax expenses or benefits are based on the changes in the net deferred tax asset or
liability from period to period. Deferred tax assets and liabilities are the result of timing differences in recognition of revenue and
expense for income tax and financial statement purposes. No deferred income tax valuation allowance is provided since it is more
likely than not that realization of the deferred income tax asset will occur in future years.
The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in
the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the
appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more likely
than not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized
upon ultimate settlement. Tax positions that previously failed to meet the more likely than not recognition threshold should be
recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions
that no longer meet the more likely than not recognition threshold should be reversed in the first subsequent financial reporting
period in which that threshold is no longer met. There is currently no liability for uncertain tax positions and no known
unrecognized tax benefits. With limited exception, the Company’s federal and state income tax returns for taxable years through
2016 have been closed for purposes of examination by the federal and state taxing jurisdictions.
Operating Segments
An operating segment is defined as a component of an enterprise that engages in business activities that generates revenue and
incurs expense, and the operating results of which are reviewed by the chief operating decision maker in the determination of
resource allocation and performance. While the Company’s chief decision makers monitor the revenue streams of the various
Company’s products and services, operations are managed and financial performance is evaluated on a Company-wide basis. The
Company has identified three reportable segments: CoRe banking; mortgage banking; and financial holding company.
Business Combinations
U.S. GAAP requires that the acquisition method of accounting, formerly referred to as the purchase method, be used for all
business combinations that an acquirer is identified for each business combination. Under U.S. GAAP, the acquirer is the entity
that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer
achieves control. U.S. GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed and any
non-controlling interest in the acquired entity at the acquisition date.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (iii) the
Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their
maturity.
Recent Accounting Pronouncements and Developments
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General
(Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirement for Defined Benefit Plans, which modifies
the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The updates in this
ASU are part of the disclosure framework project ASU 2018-14 and modify the disclosure requirements under ASC 715-20 for
employers that sponsor defined benefit pension or other postretirement plans. Those modifications include the removal and
addition of disclosure requirements as well as clarifying specific disclosure requirements. The ASU removed the following
disclosures: 1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic
benefit cost over the next fiscal year; 2) the amount and timing of plan assets expected to be returned to the employer; 3) the
disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; 4) related party disclosures
about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the
employer or related parties and the plan; 5) for nonpublic entities, the reconciliation of the opening balances to the closing
balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy; however, nonpublic entities will be
required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level
3 plan assets and 6) for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the
(i) aggregate of the service and interest cost components of net periodic benefit costs and (ii) benefit obligation for postretirement
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health care benefits. The ASU added the following disclosures: 1) the weighted-average interest crediting rates for cash balance
plans and other plans with promised interest crediting rates and 2) an explanation of the reasons for significant gains and losses
related to changes in the benefit obligation for the period. The ASU then clarified the following disclosures: 1) the projected
benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs more than plan assets; and 2) the accumulated
benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs more than plan assets. ASU 2018-14 is effective for
public business entities for fiscal years ending after December 15, 2020. As ASU 2018-14 only revises disclosure requirements, it
did not have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement. The updates in this ASU are part of the disclosure framework project and
modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The modifications include
additions, modification and removal of disclosure requirements. The ASU removed the following disclosure requirements: 1) the
amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers
between levels, 3) the valuation process for Level 3 fair value measurements and 4) for nonpublic entities, the changes in
unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the
reporting period. The ASU added the following disclosure requirements: 1) the changes in unrealized gains and losses for the
period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting
period; and 2) the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value
measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or
arithmetic average) in lieu of the weighted-average if the entity determines that other quantitative information would be a more
reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
The ASU also modified the following disclosure requirements: 1) in lieu of a rollforward for Level 3 fair value measurements, a
nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of
Level 3 assets and liabilities; 2) for investments in certain entities that calculate net asset value, an entity is required to disclose
the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee
has communicated the timing to the entity or announced the timing publicly; and 3) clarification that the measurement uncertainty
disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 is effective
for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. Adoption of
this standard did not have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments and subsequent amendments to the initial guidance in November 2018, ASU 2018-19, Codification
Improvements to Topic 326, Financial Instruments – Credit Losses, in April 2019, ASU 2019-04, Codification Improvements to
Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, in
May 2019, ASU 2019-05, Financial Instruments – Credit Losses, Topic 326 and in November 2019, ASU 2019-10, Financial
Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates and ASU
2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, all of which clarifies codification and
corrects unintended application of the guidance. The new guidance replaces the incurred loss impairment methodology in current
U.S. GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine
credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by
using an allowance for credit losses. PCI loans will receive an allowance account at the acquisition date that represents a
component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an
allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. The guidance
was initially effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. On
November 15, 2019, the FASB issued ASU 2019-10, Financial Investments – Credit Issues (Topic 326), Derivatives and Hedging
(Topic 815), and Leases (Topic 842): Effective Dates, which finalizes a delay in the effective date of the standard for smaller
reporting companies until January 2023. The Company expects to recognize a one-time cumulative effect adjustment to the
allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet
determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial
statements. In that regard, the Company has formed a cross-functional implementation team. The team is working to develop an
implementation plan which will include assessment and documentation of processes, internal controls and data sources; model
development and documentation; and system configuration, among other things. The Company is also in the process of
implementing a third-party vendor solution to assist it in the application of this standard. The adoption of this standard could
result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses
allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses
allowances for losses expected to be incurred over the life of the portfolio. While the Company is currently unable to reasonably
estimate the impact of adopting ASU 2016-13, it expects that the impact of adoption will be significantly influenced by the
composition, characteristics and quality of its loan portfolio, as well as the prevailing economic conditions and forecasts as of the
adoption date.
81
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and
Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323,
and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method
investments and certain derivatives, including accounting for the transition into and out of the equity method and measuring
certain purchased options and forward contracts to acquire investments. The amendments will be effective for the Company on
January 1, 2021. The Company does not expect this standard to have a material effect on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. The amendments represent
clarification and improvements to the codification and correct unintended application. This standard was effective immediately
upon issuance and its adoption did not have a material effect on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting. The amendments provide optional expedients and exceptions for certain contracts, hedging
relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of rate
reform. The guidance is effective from the date of issuance until December 31, 2022. The guidance permits entities to not apply
modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the
discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the de-designation
criteria of the hedging relationship and the assessment of hedge effectiveness during the transition period. In January 2021, ASU
2021-01 was issued by the FASB and clarifies that certain exceptions in reference rate reform apply to derivatives that are
affected by the discounting transition. The Company will continue to assess the impact as the reference rate transition occurs over
the next two years.
In August 2020, the SEC issued a final rule that modernizes the disclosure requirements in Regulation S-K relating to the
description of the business, legal proceedings, and risk factors, which are required in many SEC filings, including Form 10-K and
registration statements. The final rule was effective in November 2020, 30 days after its date of publication in the Federal
Register. The Company adopted the amendments in preparing this report.
Note 2 – Investment Securities
Amortized cost and fair values of investment securities available-for-sale at December 31, 2020 are summarized as follows:
(Dollars in thousands)
United States government agency securities
United States sponsored mortgage-backed securities
Municipal securities
Other debt securities
Total debt securities
Other securities
Total investment securities available-for-sale
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Fair Value
$
$
56,207 $
94,968
223,642
7,500
382,317
18,401
400,718 $
995 $
972
8,327
—
10,294
146
10,440 $
(210) $
(171)
(82)
—
(463)
(71)
(534) $
56,992
95,769
231,887
7,500
392,148
18,476
410,624
Amortized cost and fair values of investment securities available-for-sale at December 31, 2019 are summarized as follows:
(Dollars in thousands)
United States government agency securities
United States sponsored mortgage-backed securities
Municipal securities
Total debt securities
Other securities
Total investment securities available-for-sale
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Fair Value
$
$
52,046 $
58,748
108,750
219,544
12,247
231,791 $
199 $
188
4,399
4,786
181
4,967 $
(249) $
(624)
(57)
(930)
(7)
(937) $
51,996
58,312
113,092
223,400
12,421
235,821
82
The following table summarizes amortized cost and fair values of debt securities by maturity:
(Dollars in thousands)
Within one year
After one year, but within five years
After five years, but within ten years
After ten years
Total
December 31, 2020
Available for sale
Amortized Cost
Fair Value
$
$
— $
9,254
36,097
336,966
382,317 $
—
9,629
36,863
345,656
392,148
The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities
may repay sooner than scheduled.
Investment securities with a carrying value of $229.4 million and $68.0 million at December 31, 2020 and 2019, respectively,
were pledged to secure public funds, repurchase agreements and potential borrowings at the Federal Reserve discount window.
The Company’s investment portfolio includes securities that are in an unrealized loss position as of December 31, 2020, the
details of which are included in the following table. Although these securities, if sold at December 31, 2020 would result in a
pretax loss of $0.5 million, the Company has no intent to sell the applicable securities at such fair values, and maintains the
Company has the ability to hold these securities until all principal has been recovered. It is more likely than not that the Company
will not, for liquidity purposes, sell any securities at a loss. Declines in the fair values of these securities can be traced to general
market conditions, which reflect the prospect for the economy as a whole. When determining other-than-temporary impairment on
securities, the Company considers such factors as adverse conditions specifically related to a certain security or to specific
conditions in an industry or geographic area, the time frame securities have been in an unrealized loss position, the Company’s
ability to hold the security for a period of time sufficient to allow for anticipated recovery in value, whether or not the security has
been downgraded by a rating agency and whether or not the financial condition of the security issuer has severely deteriorated. As
of December 31, 2020, the Company considers all securities with unrealized loss positions to be temporarily impaired, and
consequently, does not believe the Company will sustain material realized losses as a result of the current temporary decline in
fair value.
The following table discloses the length of time that investments have remained in an unrealized loss position at December 31,
2020:
(Dollars in thousands)
Description and number of positions
United States government agency securities (27)
United States sponsored mortgage-backed securities (9)
Municipal securities (14)
Other securities (5)
Less than 12 months
12 months or more
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
$
$
19,021 $
15,331
11,856
3,947
50,155 $
(68) $
(155)
(82)
(71)
(376) $
12,574 $
3,349
—
—
15,923 $
(142)
(16)
—
—
(158)
The following table discloses the length of time that investments have remained in an unrealized loss position at December 31,
2019:
(Dollars in thousands)
Description and number of positions
United States government agency securities (26)
United States sponsored mortgage-backed securities (40)
Municipal securities (13)
Other securities (2)
Less than 12 months
12 months or more
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
$
8,160 $
16,660
6,018
1,093
31,931 $
$
(59) $
(170)
(40)
(7)
(276) $
15,399 $
27,498
828
—
43,725 $
(190)
(454)
(17)
—
(661)
83
The following table summarizes the investment sales and related gains and losses in 2020, 2019 and 2018:
(Dollars in thousands)
Sales of available-for-sale investments
Gross gains
Gross losses
Sales of equity investments
Gross gains
Gross losses
2020
2019
2018
$
$
54,023 $
948
34
4,622 $
3,501
—
31,220 $
105
271
5,968 $
—
7
2,743
352
25
—
—
—
The Company recognized unrealized holding gains on equity securities of $0.4 million, $13.8 million and $0.6 million in 2020,
2019 and 2018, respectively, and these were recorded in noninterest income. A majority of the 2019 unrealized holding gains on
equity securities was the result of the Company recognizing a $13.5 million pre-tax gain after a valuation on its Fintech
investment portfolio in the second quarter of 2019.
There were no held-to-maturity securities at December 31, 2020 or December 31, 2019 and the Company sold no held-to-maturity
investments during the years of 2020, 2019 or 2018.
Note 3 – Loans and Allowance for Loan Losses
Prior to the ICM transaction, the Company routinely generated one to four family mortgages for sale into the secondary market.
During 2020, 2019 and 2018, the Company recognized sales proceeds of $1.48 billion, $1.61 billion and $1.24 billion, resulting in
mortgage fee income of $33.4 million, $41.0 million and $32.3 million, respectively.
The components of loans in the Consolidated Balance Sheet at December 31, were as follows:
(Dollars in thousands)
Commercial and non-residential real estate
Residential
Home equity
Consumer
PCI loans:
Commercial and non-residential real estate
Residential
Consumer
Total loans
Deferred loan origination costs and (fees), net
Loans receivable
2020
1,141,114 $
240,264
30,828
3,156
21,008
16,943
1,488
1,454,801
(1,057)
1,453,744 $
2019
1,063,828
271,604
35,106
3,697
—
—
—
1,374,235
306
1,374,541
$
$
The following table summarizes the primary segments of the loan portfolio, excluding PCI loans, as of December 31, 2020 and
2019:
(Dollars in thousands)
December 31, 2020
Individually evaluated for impairment
Collectively evaluated for impairment
Total Loans
December 31, 2019
Individually evaluated for impairment
Collectively evaluated for impairment
Total Loans
Commercial
Residential
Home
Equity
Consumer
Total
13,334 $
$
1,127,780
$ 1,141,114 $ 240,264 $
1,960 $
238,304
7,401 $
$
1,056,427
$ 1,063,828 $ 271,604 $
1,953 $
269,651
95 $
30,733
30,828 $
5 $
3,151
3,156 $
15,394
1,399,968
1,415,362
95 $
35,011
35,106 $
34 $
3,663
3,697 $
9,483
1,364,752
1,374,235
The Company currently manages its loan portfolios and the respective exposure to credit losses (credit risk) by the following
specific portfolio segments which are levels at which the Company develops and documents its systematic methodology to
84
determine the allowance for credit losses attributable to each respective portfolio segment. These segments are as follows:
Commercial business loans – Commercial loans are made to provide funds for equipment and general corporate needs, as well as
to finance owner occupied real estate, and to finance future cash flows of Federal Government lease contracts. Repayment of
these loans primarily uses the funds obtained from the operation of the borrower’s business. Commercial loans also include lines
of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and
inventory. This segment includes both company originated and purchased participation loans. Credit risk arises from the
successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse
conditions in the local and regional economy.
Commercial real estate loans – Commercial real estate loans consist of non-owner occupied properties, such as investment
properties for retail, office and multifamily with a history of occupancy and cash flow. This segment includes both company
originated and purchased participation loans. These loans carry the risk of adverse changes in the local economy and a tenant’s
deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.
Commercial acquisition, development and construction loans – Commercial acquisition, development and construction loans are
intended to finance the construction of commercial and residential properties, including the construction of single-family
dwellings, and also includes loans for the acquisition and development of land. Construction loans represent a higher degree of
risk than permanent real estate loans and may be affected by a variety of factors such as the borrower’s ability to control costs and
adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame
or at the anticipated price. The loan commitment on these loans often includes an interest reserve that allows the lender to
periodically advance loan funds to pay interest charges on the outstanding balance of the loan.
Commercial SBA PPP loans –This segment includes the loan originated through the recently created SBA PPP loans. Credit risk
is heightened as this SBA program mandates that these loans require no collateral and no guarantors of the loans. However, the
loans are backed by a full guaranty of the SBA, so long as the loans were originated in accordance with the program guidelines.
Additionally, these loans are eligible for full forgiveness by the SBA so long as the borrowers comply with the program
guidelines as it pertains to their eligibility to borrow these funds, as well as their use of the funds.
Residential mortgage loans – This residential real estate subsegment contains permanent and construction mortgage loans
principally to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of
repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral
values. Credit risk arises from the borrower’s, and where applicable the builder's, continuing financial stability, which can be
adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors. Also impacting credit risk would be
a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or
subsequent liquidation of the real estate collateral.
Home equity lines of credit – This segment includes subsegment for senior lien and subordinate lien lines of credit. Credit risk is
similar to residential real estate loans described above as it is subject to the borrower’s continuing financial stability and the value
of the collateral securing the loan.
Consumer loans – This segment of loans includes primarily installment loans and personal lines of credit. Consumer loans
include installment loans used by clients to purchase automobiles, boats and recreational vehicles. Credit risk is similar to
residential real estate loans described above as it is subject to the borrower’s continuing financial stability and the value of the
collateral securing the loan.
85
The following table presents impaired loans by class, excluding PCI loans, segregated by those for which a specific allowance
was required and those for which a specific allowance was not necessary as of December 31, 2020 and 2019:
(Dollars in thousands)
December 31, 2020
Commercial:
Commercial business
Commercial real estate
Acquisition and development
Total commercial
Residential
Home equity
Consumer
Total impaired loans
December 31, 2019
Commercial:
Commercial business
Commercial real estate
Acquisition and development
Total commercial
Residential
Home equity
Consumer
Total impaired loans
Impaired Loans with
Specific Allowance
Impaired
Loans with
No Specific
Allowance
Total Impaired Loans
Recorded
Investment
Related
Allowance
Recorded
Investment
Recorded
Investment
Unpaid
Principal
Balance
$
$
$
$
3,431 $
772
—
4,203
—
—
—
4,203 $
2,606 $
1,786
—
4,392
—
—
—
4,392 $
1,032 $
264
—
1,296
—
—
—
1,296 $
5,653 $
944
2,534
9,131
1,960
95
5
11,191 $
9,084 $
1,716
2,534
13,334
1,960
95
5
15,394 $
249 $
325
—
574
—
—
—
574 $
644 $
295
2,070
3,009
1,953
95
34
5,091 $
3,250 $
2,081
2,070
7,401
1,953
95
34
9,483 $
10,440
1,864
3,939
16,243
2,232
95
5
18,575
4,308
2,171
3,467
9,946
2,045
100
35
12,126
The following table presents the average recorded investment in impaired loans, excluding PCI loans, and related interest income
recognized for the years ended:
December 31, 2020
December 31, 2019
December 31, 2018
Average
Investment
in
Impaired
Loans
Interest
Income
Recognized
on Accrual
Basis
Interest
Income
Recognized
on Cash
Basis
Average
Investment
in
Impaired
Loans
Interest
Income
Recognized
on Accrual
Basis
Interest
Income
Recognized
on Cash
Basis
Average
Investment
in
Impaired
Loans
Interest
Income
Recognized
on Accrual
Basis
Interest
Income
Recognized
on Cash
Basis
$
6,066 $
— $
— $
3,202 $
— $
— $
4,052 $
51 $
106
3,057
1,207
10,330
2,541
87
7
97
67
164
19
—
—
104
73
177
19
—
—
3,220
2,151
8,573
2,719
154
45
162
123
285
16
2
—
140
131
271
16
2
—
6,416
1,367
11,835
2,569
100
149
159
106
316
20
2
—
94
8
208
14
1
—
$
12,965 $
183 $
196 $
11,491 $
303 $
289 $
14,653 $
338 $
223
(Dollars in
thousands)
Commercial:
Commercial
business
Commercial real
estate
Acquisition and
development
Total commercial
Residential
Home equity
Consumer
Total
As of December 31, 2020, there are five loans collateralized by residential real estate property in the process of foreclosure. The
total recorded investment in these loans was $0.2 million as of December 31, 2020. These loans are included in the table above
and have no specific allowance allocated to them.
As of December 31, 2020, the loans acquired through the acquisition of First State held 32 foreclosed residential real estate
properties, representing $2.6 million, or 56.6%, of the total balance of other real estate owned. These properties are held as a
result of the foreclosures of various commercial loans to different borrowers. There are eleven additional loans collateralized by
86
residential real estate property in the process of foreclosure. The total recorded investment in these loans was $1.1 million as of
December 31, 2020. These loans are included in the table above and have no specific allowance allocated to them.
As of December 31, 2019, the Bank held eleven foreclosed residential real estate properties representing $0.6 million, or 40.9%,
of the total balance of other real estate owned. These properties are held as a result of the foreclosures of primarily two
commercial loan relationships, one of which included two properties for a total of $0.3 million, while the other included seven
properties for a total of $0.2 million. The three remaining properties, totaling $0.1 million, were the result of the foreclosure of
two unrelated borrowers. There are seven additional consumer mortgage loans collateralized by residential real estate property in
the process of foreclosure. The total recorded investment in these loans was $0.6 million as of December 31, 2019. These loans
are included in the table above and have no specific allowance allocated to them.
Bank management uses a nine point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first
six categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by
management generally follow bank regulatory definitions.
Loans categorized as “Pass” rated have adequate sources of repayment, with little identifiable risk of collection and general
conformity to the Bank's policy requirements, product guidelines and underwriting standards. Any exceptions that are identified
during the underwriting and approval process have been adequately mitigated by other factors.
Loans categorized as “Special Mention” rated have potential weaknesses that deserve management’s close attention. If left
uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s
credit position at some future date. Special mention assets are not adversely classified and do not expose the institution to
sufficient risk to warrant adverse classification.
Loans categorized as “Substandard” rated are inadequately protected by the current sound worth and paying capacity of the
borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize
the liquidation of the debt and are characterized by the distinct possibility that bank will sustain some loss if the deficiencies are
not corrected.
Loans categorized as “Doubtful” rated have all the weakness inherent in those classified substandard with the added characteristic
that the weakness make collections or liquidation in full, on the basis of currently known facts, conditions and values, highly
questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would
salvage the debt.
The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and
unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have
well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained
if the weaknesses are not corrected. Any portion of a loan that has been or is expected to be charged off is placed in the Loss
category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the
Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and
residential mortgage loans are included in the Pass categories unless a specific action, such as past due status, bankruptcy,
repossession or death occurs to raise awareness of a possible credit event. The Bank’s Chief Credit Officer is responsible for the
timely and accurate risk rating of the loans in the portfolio at origination and on an ongoing basis. The Credit Department ensures
that a review of all commercial relationships of $1.0 million or greater is performed annually.
Review of the appropriate risk grade is included in both the internal and external loan review process, and on an ongoing basis.
The Bank has an experienced Credit Department that continually reviews and assesses loans within the portfolio. The Bank
engages an external consultant to conduct independent loan reviews on at least an annual basis. Generally, the external consultant
reviews larger commercial relationships or criticized relationships. The Credit Department compiles detailed reviews, including
plans for resolution, on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard
categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
87
The following table represents the classes of the loan portfolio, excluding PCI loans, summarized by the aggregate Pass and the
criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of December 31, 2020
and 2019:
(Dollars in thousands)
December 31, 2020
Commercial:
Commercial business
Commercial real estate
Acquisition and development
SBA PPP
Total commercial
Residential
Home equity
Consumer
Total Loans
December 31, 2019
Commercial:
Commercial business
Commercial real estate
Acquisition and development
Total commercial
Residential
Home equity
Consumer
Total Loans
Pass
Special
Mention
Substandard
Doubtful
Total
$
496,222 $
356,544
80,771
81,975
1,015,512
236,250
30,277
3,124
$ 1,285,163 $
9,529 $
32,044
25,001
—
66,574
948
381
32
67,935 $
17,045 $
34,001
4,184
—
55,230
2,896
144
—
58,270 $
1,095 $
533
2,170
—
3,798
170
26
—
523,891
423,122
112,126
81,975
1,141,114
240,264
30,828
3,156
3,994 $ 1,415,362
$
511,590 $
406,712
106,428
1,024,730
267,367
34,641
3,613
$ 1,330,351 $
17,398 $
11,894 $
3,564
1,869
22,831
1,946
383
56
25,216 $
1,494
2,879
16,267
2,177
82
28
18,554 $
540,882
— $
411,770
—
111,176
—
1,063,828
—
271,604
114
35,106
—
—
3,697
114 $ 1,374,235
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as
determined by the length of time a recorded payment is past due.
A loan that has deteriorated and requires additional collection efforts by the Bank could warrant non-accrual status. A thorough
review is presented to the Chief Credit Officer and/or the SARC, as required with respect to any loan which is in a collection
process and to make a determination as to whether the loan should be placed on non-accrual status. The placement of loans on
non-accrual status is subject to applicable regulatory restrictions and guidelines. Generally, loans should be placed in non-accrual
status when the loan reaches 90 days past due, when it becomes likely the borrower cannot or will not make scheduled principal
or interest payments, when full repayment of principal and interest is not expected or when the loan displays potential loss
characteristics. Normally, all accrued interest is charged off when a loan is placed in non-accrual status, unless the Company
believes it is likely the accrued interest will be collected. Any payments subsequently received are applied to principal. To remove
a loan from non-accrual status, all principal and interest due must be paid up to date and the Bank is reasonably sure of future
satisfactory payment performance. Usually, this requires the receipt of six consecutive months of regular, on-time payments.
Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and/or SARC.
88
The following table presents the classes of the loan portfolio, excluding PCI loans, summarized by aging categories of performing
loans and nonaccrual loans as of December 31, 2020 and 2019:
Current
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Total Past
Due
Total
Loans
Non-
Accrual
90+ Days
Still
Accruing
(Dollars in thousands)
December 31, 2020
Commercial:
Commercial business
Commercial real estate
Acquisition and development
SBA PPP
$ 521,799 $
1,040 $
33 $
1,019 $
2,092 $ 523,891 $
8,601 $
422,343
109,686
81,975
34
—
—
1,074
2,058
289
—
212
—
—
245
1,969
75
—
533
2,440
—
3,992
817
95
—
779
2,440
—
423,122
112,126
81,975
5,311
1,141,114
4,844
240,264
459
—
30,828
3,156
944
2,534
—
12,079
1,534
95
5
Total commercial
1,135,803
Residential
Home equity
Consumer
235,420
30,369
3,156
Total Loans
$ 1,404,748 $
3,421 $
2,289 $
4,904 $
10,614 $ 1,415,362 $
13,713 $
December 31, 2019
Commercial:
Commercial business
Commercial real estate
Acquisition and development
Total commercial
Residential
Home equity
Consumer
$ 537,602 $
3,189 $
47 $
44 $
3,280 $ 540,882 $
2,848 $
411,070
110,717
1,059,389
267,515
34,382
3,610
522
180
3,891
3,003
545
1
178
—
225
549
84
58
—
279
323
537
95
28
700
459
411,770
111,176
4,439
1,063,828
4,089
271,604
724
87
35,106
3,697
295
390
3,533
1,461
95
34
Total Loans
$ 1,364,896 $
7,440 $
916 $
983 $
9,339 $ 1,374,235 $
5,123 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
The ALL is maintained to absorb losses from the loan portfolio and is based on management’s continuing evaluation of the risk
characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the
portfolio, adequacy of collateral, past and anticipated loss experience and the amount of non-performing loans.
Interest income on loans would have increased by approximately $0.6 million, $0.6 million and $0.8 million for 2020, 2019 and
2018, respectively, if loans had performed in accordance with their terms.
The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310 for loans individually
evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as
the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of
the two components represents the Bank’s ALL. The Bank analyzes certain impaired loans in homogeneous pools, rather than on
an individual basis, when those loans are below specific thresholds based on outstanding principal balance. More specifically,
residential mortgage loans, home equity lines of credit and consumer loans, when considered impaired, are evaluated collectively
for impairment by applying allocation rates derived from the Bank’s historical losses specific to impaired loans and the reserve
totaled $0.1 million and $0.1 million, and $0.2 million as of December 31, 2020, 2019 and 2018, respectively.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general
allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are
modified by qualified factors.
The segments described above, which are based on the Federal call code assigned to each loan, provide the starting point for the
ALL analysis. Company and Bank management track the historical net charge-off activity at the call code level. A historical
charge-off factor is calculated utilizing a defined number of consecutive historical quarters. All pools currently utilize a rolling 12
quarters.
“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. Loans in the criticized pools,
which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management
and subject to additional qualitative factors.
89
Company and Bank management have identified a number of additional qualitative factors which it uses to supplement the
historical charge-off factor as these factors are likely to cause estimated credit losses associated with the existing loan pools to
differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained
from internal, regulatory and governmental sources are: lending policies and procedures, nature and volume of the portfolio,
experience and ability of lending management and staff, volume and severity of problem credits, conclusion of loan reviews,
audits and exams, changes in the value of underlying collateral, effect of concentrations of credit from a loan type, industry and/or
geographic standpoint, changes in economic and business conditions, consumer sentiment and other external factors. The
combination of historical charge-off and qualitative factors are then weighted for each risk grade. These weightings are
determined internally based upon the likelihood of loss as a loan risk grading deteriorates.
To estimate the liability for off-balance sheet credit exposures, Bank management analyzed the portfolios of letters of credit, non-
revolving lines of credit and revolving lines of credit and based its calculation on the expectation of future advances of each loan
category. Letters of credit were determined to be highly unlikely to advance since they are generally in place only to ensure
various forms of performance of the borrowers. In the Bank’s history, there have been no letters of credit drawn upon. In addition,
many of the letters of credit are cash secured and do not warrant an allocation. Non-revolving lines of credit were determined to
be highly likely to advance as these are typically construction lines. Meanwhile, the likelihood of revolving lines of credit
advancing varies with each individual borrower. Therefore, the future usage of each line was estimated based on the average line
utilization of the revolving line of credit portfolio as a whole.
Once the estimated future advances were calculated, an allocation rate, which was derived from the Bank’s historical losses and
qualitative environmental factors, was applied in the similar manner as those used for the allowance for loan loss calculation. The
resulting estimated loss allocations were totaled to determine the liability for unfunded commitments related to these loans, which
Management considers necessary to anticipate potential losses on those commitments that have a reasonable probability of
funding. The liability for unfunded commitments was $0.6 million and $0.3 million as of December 31, 2020 and 2019,
respectively.
Bank management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make
appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these
amounts are promptly charged off against the ALL.
The following tables summarize the activity of primary segments of the ALL, excluding the ALL related to PCI loans, segregated
into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated
for impairment for the years ending December 31, 2020, 2019 and 2018:
(Dollars in thousands)
ALL balance at December 31, 2019
Charge-offs
Recoveries
Provision
Allowance contributed with mortgage combination transaction
ALL balance at December 31, 2020
Individually evaluated for impairment
Collectively evaluated for impairment
(Dollars in thousands)
ALL balance at December 31, 2018
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2019
Individually evaluated for impairment
Collectively evaluated for impairment
Commercial
$
Residential
Home Equity
Consumer
Total
1,272 $
(224)
—
684
(354)
1,378 $
— $
1,378 $
327 $
(23)
9
(15)
—
298 $
— $
298 $
78 $
—
3
(30)
—
51 $
— $
51 $
11,775
(2,179)
34
16,484
(354)
25,760
1,296
24,464
Residential
Home Equity
Consumer
Total
1,405 $
—
1
(134)
1,272 $
— $
1,272 $
684 $
—
4
(361)
327 $
— $
327 $
245 $
(10)
49
(206)
78 $
— $
78 $
10,939
(1,008)
55
1,789
11,775
574
11,201
10,098 $
(1,932)
22
15,845
—
24,033 $
1,296 $
22,737 $
8,605 $
(998)
1
2,490
10,098 $
574 $
9,524 $
Commercial
$
$
$
$
$
$
$
90
(Dollars in thousands)
ALL balance at December 31, 2017
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2018
Individually evaluated for impairment
Collectively evaluated for impairment
Commercial
$
Residential
Home Equity
Consumer
Total
7,804 $
(1,024)
15
1,810
8,605 $
1,043 $
7,562 $
1,119 $
(166)
22
430
1,405 $
— $
1,405 $
705 $
—
59
(80)
684 $
— $
684 $
250 $
(290)
5
280
245 $
— $
245 $
9,878
(1,480)
101
2,440
10,939
1,043
9,896
$
$
$
The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that
the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the
consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the
portfolio at any given date.
Troubled Debt Restructurings
At December 31, 2020 and 2019, the Bank had specific reserve allocations for TDRs of $0.6 million and $0.5 million,
respectively. Loans considered to be troubled debt restructured loans totaled $10.2 million and $7.7 million as of December 31,
2020 and December 31, 2019, respectively. Of these totals, $1.6 million and $4.4 million, respectively, represent accruing
troubled debt restructured loans and represent 12% and 46%, respectively, of total impaired loans. Meanwhile, as of December
31, 2020, $8.0 million represents seven loans to three borrowers that have defaulted under the restructured terms. The largest of
these loans, at $2.2 million, is a restructured commercial loan to a company previously dependent on the coal industry, which is
now structured as an unsecured loan. Three of these loans to an unrelated borrower, totaling $5.2 million, are restructured
equipment loans to a borrower in the coal industry, which was provided extended interest-only terms to allow time for the
collateral equipment to be sold. The last of these loans are commercial acquisition and development loans totaling $0.6 million
that were considered TDRs due to extended interest only periods and/or unsatisfactory repayment structures once transitioned to
principal and interest payments. These borrowers have experienced continued financial difficulty and are considered non-
performing loans as of December 31, 2020. The unsecured loan and the three development loans were also considered non-
performing loans as of December 31, 2019.
During the year ended December 31, 2020, no restructured loans defaulted under their modified terms that were not already
classified as non-performing for having previously defaulted under their modified terms.
There were no commitments to advance funds to any TDRs as of December 31, 2020.
91
The following table presents details related to loans identified as TDRs during the years ended December 31, 2020 and 2019.
New TDRs 1
December 31, 2020
December 31, 2019
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
(Dollars in thousands)
Commercial:
Commercial business
Commercial real estate
Acquisition and development
333
—
—
Total commercial
333
Residential
323
Home equity
—
Consumer
—
Total
656
1 The pre-modification and post-modification balances represent the balances outstanding immediately before and after
modification of the loan.
6,294 $
159
—
6,453
87
—
—
6,540 $
336 $
—
—
336
246
—
—
582 $
6 $
2
—
8
1
—
—
9 $
—
—
2
3
—
—
5 $
5,326
150
—
5,476
86
—
—
5,562
2 $
Purchased Credit Impaired Loans
As a result of the acquisition of First State, the Company has PCI loans. The Company did not hold any PCI loans as of
December 31, 2019. See Note 24 – Acquisitions and Divestitures for further details of the acquisition of First State.
The carrying amount of the PCI loan portfolio is as follows:
(Dollars in thousands)
Commercial
Residential
Consumer
Outstanding balance
Carrying amount, net of allowance
Accretable yield, or income expected to be collected, is as follows:
(Dollars in thousands)
Beginning balance
New loans purchased
Accretion of income
Reclassification from non-accretable difference
Ending balance
As of December 31, 2020
As of December 31, 2020
21,008
16,943
1,488
39,439
39,355
—
11,746
(2,945)
(488)
8,313
$
$
$
$
$
For the PCI loan portfolio disclosed above, the Company increased the allowance for loan losses by $0.1 million during 2020.
PCI loans purchased during 2020, for which it was probable at acquisition that all contractually required payments would not be
collected are as follows:
(Dollars in thousands)
Contractually required payments receivable of loans purchased during the period:
Commercial
Residential
Consumer
Cash flows expected to be collected at acquisition
Fair value of loans acquired at acquisition
$
$
$
36,046
47,787
2,990
86,823
50,235
Income is not recognized on PCI loans if the Company cannot reasonably estimate cash flows expected to be collected and, as of
92
December 31, 2020, the Company held no such loans.
The following tables summarize the primary segments of the ALL, segregated into the amount required for loans individually
evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2020 for
the PCI loan portfolio:
(Dollars in thousands)
ALL balance as of December 31, 2019
Charge-offs
Provision
ALL balance at December 31, 2020
Collectively evaluated for impairment
Residential
Total
$
$
$
— $
(11)
95
84 $
84
—
(11)
95
84
84
As of December 31, 2020, the loans in the Company's PCI loan portfolio are all collectively evaluated for impairment and are
segmented into three categories: commercial loans totaling $17.1 million, residential loans totaling $16.9 million and consumer
loans totaling $1.3 million, for portfolio total of $35.4 million.
The following table represents the classes of the PCI loan portfolio summarized by the aggregate Pass and the criticized categories
of Special Mention, Substandard and Doubtful within the internal risk rating system as of December 31, 2020:
(Dollars in thousands)
December 31, 2020
Commercial:
Pass
Special Mention
Substandard
Doubtful
Total
Commercial Business
$
12,263 $
136 $
345 $
4,860 $
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Consumer
982
1,900
15,145
15,157
1,256
3
—
139
—
—
263
—
608
1,665
—
21
235
5,116
121
232
Total Loans
$
31,558 $
139 $
2,273 $
5,469 $
17,604
1,269
2,135
21,008
16,943
1,488
39,439
The following table presents the classes of the PCI loan portfolio summarized by aging categories of performing loans and non-
accrual loans as of December 31, 2020:
(Dollars in thousands)
December 31, 2020
Commercial:
Current
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Total Past
Due
Total Loans Non-Accrual
Commercial Business
$
16,264 $
71 $
65 $
1,204 $
1,340 $
17,604 $
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Consumer
1,157
2,135
19,556
13,714
1,245
—
—
71
710
3
—
—
65
145
1
112
—
1,316
2,374
239
112
—
1,452
3,229
243
1,269
2,135
21,008
16,943
1,488
Total Loans
$
34,515 $
784 $
211 $
3,929 $
4,924 $
39,439 $
—
—
—
—
—
—
—
None of the PCI loans are considered non-accrual as they are all currently accreting interest income under PCI accounting.
As the Company's PCI loan portfolio is accounted for in pools with similar risk characteristics in accordance with ASC 310-30,
this portfolio is not subject to the impaired loan and TDR guidance. Rather, the revised estimated future cash flows of the
individually modified loans are included in the estimated future cash flows of the pool.
PPP Loans and CARES Act Deferrals
The Company is actively participating in the PPP as a lender, evaluating other programs available to assist its clients and
providing deferrals consistent with GSE guidelines. The Company originated 455 PPP loans with original balances of
$92.8 million and outstanding balances of $82.0 million as of December 31, 2020.
93
As of December 31, 2020, commercial loans totaling $34.7 million and mortgage loans totaling $13.5 million were approved for
modifications, such as interest-only payments and payment deferrals. These modifications were not considered to be troubled debt
restructurings in reliance on guidance issued by banking regulators titled the “Interagency Statement on Loan Modifications and
Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.”
Note 4 – Premises and Equipment
The following table presents the components of premises and equipment at December 31,:
(Dollars in thousands)
Land
Buildings and improvements
Furniture, fixtures and equipment
Construction in progress
Leasehold improvements
Accumulated depreciation
Premises and equipment, net
2020
2019
$
$
3,936 $
14,350
18,701
326
3,079
40,392
(14,189)
26,203 $
3,105
13,352
15,553
1,019
1,985
35,014
(13,040)
21,974
Depreciation expense totaled $3.0 million, $3.0 million and $2.8 million for 2020, 2019 and 2018, respectively.
The Company leases certain premises, for the operation of banking offices and certain equipment under operating and finance
leases. At December 31, 2020, the Company had lease liabilities totaling $18.4 million, of which $18.3 million was related to
operating leases and $0.2 million was related to finance leases, and right-of-use assets totaling $17.7 million, of which
$17.5 million was related to operating leases and $0.2 million was related to finance leases, related to these leases. Lease
liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the year ended December 31,
2020, the weighted-average remaining lease term for finance leases was 2.3 years and the weighted-average discount rate used in
the measurement of finance lease liabilities was 2.4%. At December 31, 2020, the weighted-average remaining lease term for
operating leases was 12.9 years and the weighted-average discount rate used in the measurement of operating lease liabilities was
2.9%.
The Company leases certain premises, for the operation of some banking offices and equipment under operating and finance
leases.At December 31, 2019, the Company had lease liabilities totaling $14.8 million, of which $14.6 million was related to
operating leases and $0.2 million was related to finance leases, and right-of-use assets totaling $13.5 million, of which
$13.2 million was related to operating leases and $0.3 million was related to finance leases, related to these leases. For the year
ended December 31, 2019, the weighted-average remaining lease term for finance leases was 2.7 years and the weighted-average
discount rate used in the measurement of finance lease liabilities was 2.8%. For the year ended December 31, 2019, the weighted-
average remaining lease term for operating leases was 11.8 years and the weighted-average discount rate used in the measurement
of operating lease liabilities was 3.5%.
Lease costs were as follows:
(Dollars in thousands)
Amortization of right-of-use assets, finance leases
Interest on lease liabilities, finance leases
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
December 31, 2020
December 31, 2019
$
$
65 $
4
2,072
27
38
2,206 $
77
6
2,120
72
38
2,313
Rent expense for the year ended December 31, 2018, prior to the adoption of ASU 2016-02, was $2.0 million.
There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the year ended
December 31, 2020.
94
Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more are as
follows:
(Dollars in thousands)
2021
2022
2023
2024
2025
2026 and thereafter
Total future minimum lease payments
Less: Amounts representing interest
Present value of net future minimum lease payments
Note 5 – Equity Method Investment
December 31, 2020
Finance Leases
Operating Leases
68 $
59
41
5
5
4
182 $
(6)
176 $
1,779
1,623
1,825
1,779
1,709
14,280
22,995
(4,723)
18,272
$
$
$
In the third quarter of 2020, the Company acquired a portion of ICM and recognizes its ownership as an equity method investment
initially recorded at fair value. In accordance with Rule 8-03(b)(3) of Regulation S-X, the Company must assess whether its
equity method investment is a significant equity method investment. In evaluating the significance of this investment, the
Company performed the income, asset, and investment tests described in S-X 3-05 and S-X 1-02(w). Rule 8-03(b)(3) of
Regulation S-X requires summarized financial information in a quarterly report if any of the three tests exceeds 20%. Under the
income test, the Company’s proportionate share of its equity method investee's aggregated net income exceeded the applicable
threshold of 20%, and accordingly it is required to provide summarized income statement information for this investee for all
periods presented. The Company's share of net income from its equity method investment totaled $24.2 million for the year ended
December 31, 2020.
The following table provides summarized income statement information for the Company's equity method investment. As ICM
did not exist prior to July 1, 2020, no historical financial information is presented.
(Dollars in thousands)
Total revenues
Gross profit
Net income
Gain on sale of loans
Volume of loans sold
Twelve Months Ended December 31,
2020
$
120,323
59,659
59,761
100,402
2,948,724
As of December 31, 2020, the locked mortgage pipeline was $1.54 billion. For more information, please see Note 24 –
Acquisitions and Divestitures.
95
Note 6 – Deposits
Deposits at December 31, were as follows:
(Dollars in thousands)
Demand deposits of individuals, partnerships and corporations
Noninterest-bearing demand
Interest-bearing demand
Savings and money markets
Time deposits, including CDs and IRAs
Total deposits
Time deposits that meet or exceed the FDIC insurance limit
Maturities of time deposits at December 31, 2020 were as follows (dollars in thousands):
2021
2022
2023
2024
2025
Total
2020
2019
715,791 $
496,502
545,501
224,595
1,982,389 $
278,547
351,435
363,026
272,034
1,265,042
16,955 $
8,955
126,863
62,833
20,864
12,705
1,330
224,595
$
$
$
$
$
As of December 31, 2020, overdrawn deposit accounts totaling $0.2 million were reclassified as loan balances.
Note 7 – Borrowed Funds
The Bank is a member of the FHLB of Pittsburgh, Pennsylvania. At December 31, 2019 the Bank had borrowed $222.9 million.
No amounts were outstanding as of December 31, 2020. As of December 31, 2020, the Bank's maximum borrowing capacity with
the FHLB was $452.2 million and the remaining borrowing capacity was $440.9 million, with the difference being deposit letters
of credit.
Short-term borrowings
Along with traditional deposits, the Bank has access to short-term borrowings from FHLB to fund its operations and investments.
Information related to short-term borrowings is summarized as follows:
(Dollars in thousands)
Balance at end of year
Average balance during the year
Maximum month-end balance
Weighted-average rate during the year
Weighted-average rate at December 31
Long-term borrowings
$
2020
2019
$
—
68,407
154,248
0.58 %
— %
192,063
187,226
240,811
2.24 %
1.81 %
As of December 31, 2020, the Bank had no long-term borrowings with the FHLB. As of December 31, 2019, the Bank had long-
term borrowings totaling $30.8 million. Of this total, $30.0 million was fixed interest rate notes, originated in November 2019,
due between November 2022 and November 2024, with interest of between 1.7% and 1.8% payable monthly and $0.8 million
was fixed interest rate notes, originated between October 2006 and April 2007, due between October 2021 and April 2022, with
interest of between 5.18% and 5.20% payable monthly.
Repurchase agreements
Along with traditional deposits, the Bank has access to securities sold under agreements to repurchase. Repurchase agreements
with customers represent funds deposited by customers, on an overnight basis, that are collateralized by investment securities
owned by the Company. Repurchase agreements with customers are presented as an individual line item on the consolidated
96
balance sheets. All repurchase agreements are subject to terms and conditions of repurchase/security agreements between the
Company and the client and are accounted for as secured borrowings. The Company’s repurchase agreements reflected in
liabilities consist of customer accounts and securities which are pledged on an individual security basis.
The Company monitors the fair value of the underlying securities on a monthly basis. Repurchase agreements are reflected at the
amount of cash received in connection with the transaction and included in securities sold under agreements to repurchase on the
consolidated balance sheets. The primary risk with the Company's repurchase agreements is market risk associated with the
investments securing the transactions, as it may be required to provide additional collateral based on fair value changes of the
underlying investments. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents.
All of the Company’s repurchase agreements were overnight agreements at December 31, 2020 and December 31, 2019. These
borrowings were collateralized with investment securities with a carrying value of $10.7 million and $10.5 million at
December 31, 2020 and December 31, 2019, respectively, and were comprised of United States Government Agencies and
Mortgage backed securities. Declines in the value of the collateral would require the Company to increase the amounts of
securities pledged.
Information related to repurchase agreements is summarized as follows:
(Dollars in thousands)
Balance at end of year
Average balance during the year
Maximum month-end balance
Weighted-average rate during the year
Weighted-average rate at December 31
Subordinated Debt
Information related to subordinated debt is summarized as follows:
(Dollars in thousands)
Balance at end of year
Average balance during the year
Maximum month-end balance
Weighted-average rate during the year
Weighted-average rate at December 31
$
$
2020
2019
$
10,266
9,856
10,505
0.23 %
0.14 %
2020
2019
$
43,407
7,568
43,524
3.45 %
4.02 %
10,172
11,252
14,655
0.43 %
0.44 %
4,124
12,125
17,524
6.35 %
3.51 %
In November 2020, the Company completed the private placement of $40 million fixed-to-floating rate subordinated notes to
certain qualified institutional investors. These notes are unsecured and have a ten-year term, maturing December 1, 2030, and will
bear interest at a fixed rate of 4.25%, payable semi-annually in arrears, for the first five years of the term. Thereafter, the interest
rate will reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term
SOFR, plus 401 basis points, payable quarterly in arrears. These notes have been structured to qualify as Tier 2 capital for
regulatory capital purposes.
In March 2007, the Company completed the private placement of $4 million Floating Rate, Trust Preferred Securities through its
MVB Financial Statutory Trust I subsidiary (the “Trust”). The Company established the Trust for the sole purpose of issuing the
Trust Preferred Securities pursuant to an Amended and Restated Declaration of Trust. The Trust Preferred Securities and the
Debentures mature in 2037 and have been redeemable by the Company since 2012. Interest payments are due in March, June,
September and December and are adjusted at the interest due dates at a rate of 1.62% over the three-month LIBOR Rate. The
obligations of the Company with respect to the issuance of the trust preferred securities constitute a full and unconditional
guarantee by the Company of the Trust’s obligations with respect to the trust preferred securities to the extent set forth in the
related guarantees. The securities issued by the Trust are includable for regulatory purposes as a component of the Company’s
Tier 1 capital.
In June 2014, the Company issued its Convertible Subordinated Promissory Notes to various investors in the aggregate principal
amount of $29.4 million. The notes were issued in $0.1 million increments per note, subject to a minimum investment of $1
million. The Notes were to expire 10 years after the initial issuance date of the Notes. In July 2019, the Federal Reserve Board
provided the Company with its approval for the Company to redeem all of the outstanding Notes. On or about August 1, 2019, the
97
Company provided notice to the holders of the outstanding notes that it would redeem the outstanding notes on September 30,
2019.
In 2019, $1.0 million of subordinated debt was converted into common stock, which resulted in the issuance of 62,500 new shares
and $12.4 million of subordinated debt was redeemed. These transactions provided an annual interest expense savings of
$1.0 million.
In 2018, $16.0 million of subordinated debt was converted into common stock, which resulted in the issuance of 1,000,000 new
shares and providing an annual interest expense savings of $1.1 million.
The Company recognized interest expense on its subordinated debt of $0.3 million, $0.8 million and $1.8 million for the years
ended December 31, 2020, 2019 and 2018, respectively.
Note 8 – Commitments and Contingent Liabilities
Commitments
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the
statements of financial condition.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for
commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case
basis. The amount and type of collateral obtained, if deemed necessary by the Company upon extension of credit, varies and is
based on management’s credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a
third-party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment
of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to
customers. The Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that
involved in making commitments to extend credit.
Specifically, the Bank has entered into agreements to extend credit or provide conditional payments pursuant to standby and
commercial letters of credit. In addition, the Bank utilizes letters of credit issued by the FHLB to collateralize certain public funds
deposits.
Total contractual amounts of the commitments as of December 31, were as follows:
(Dollars in thousands)
Available on lines of credit
Stand-by letters of credit
Other loan commitments
Concentration of Credit Risk
2020
2019
393,814 $
19,806
22,418
436,038 $
385,871
18,145
24,821
428,837
$
$
The Company grants a majority of its commercial, financial, agricultural, real estate and installment loans to customers
throughout the North Central West Virginia Northern Virginia markets. Collateral for loans is primarily residential and
commercial real estate, personal property and business equipment. The Company evaluates the credit worthiness of each of its
customers on a case-by-case basis and the amount of collateral it obtains is based upon management’s credit evaluation.
98
Regulatory
The Company is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board
requirements. In accordance with these requirements, the Company implemented a deposit reclassification program that allowed
the Company to maintain no such reserve balances as of December 31, 2020 and 2019.
Contingent Liabilities
The subsidiary Bank is involved in various legal actions arising in the ordinary course of business. In the opinion of management
and counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.
Note 9 – Income Taxes
The provisions for income taxes for the years ended December 31, were as follows:
(Dollars in thousands)
Current:
Federal
State
Deferred:
Federal
State
Income tax expense
2020
2019
2018
$
$
$
$
10,899 $
2,019
12,918 $
(3,183) $
(203)
(3,386)
9,532 $
10,450 $
2,101
12,551 $
(3,716) $
(237)
(3,953)
8,598 $
2,203
1,031
3,234
117
22
139
3,373
Following is a reconciliation of income taxes at federal statutory rates to recorded income taxes for the year ended December 31:
(Dollars in thousands)
Amount
%
Amount
%
Amount
%
Income tax at federal statutory rate
$
9,858
21.0 % $
7,353
21.0 % $
3,229
21.0 %
2020
2019
2018
Tax effect of:
State income taxes, net of federal income taxes
Tax exempt earnings
Other
1,435
(1,381)
(380)
3.1 %
(3.0) %
(0.8) %
2,101
(856)
—
6.0 %
(2.8) %
— %
738
(594)
—
$
9,532
20.3 % $
8,598
24.2 % $
3,373
4.8 %
(3.9) %
— %
21.9 %
99
Deferred income tax assets and liabilities were comprised of the following at December 31:
(Dollars in thousands)
Gross deferred tax assets:
Allowance for loan losses
Minimum pension liability
SERP/RSU
Other
Total gross deferred tax assets
Gross deferred tax liabilities:
Depreciation
Pension
Unrealized gain on securities available-for-sale
Holding gain on equity securities
Goodwill
Total gross deferred tax liabilities
2020
2019
$
7,141 $
1,544
1,039
1,209
10,933
(1,733)
(262)
(2,320)
(3,893)
(2,498)
(10,706)
3,310
1,589
652
10
5,561
(1,505)
(164)
(1,088)
(3,838)
(2,134)
(8,729)
Net deferred tax assets (liabilities)
$
227 $
(3,168)
Deferred income tax assets and deferred income tax liabilities were included in other assets and other liabilities, respectively.
The Company has invested, as a limited partner, in three Section 42 affordable housing investment funds. In exchange for these
investments, the Company receives its pro rata share of income, expense, gains and losses, including tax credits, that are received
by the projects. As of December 31, 2020 and December 31, 2019, the Company recognized, as an investment, $2.8 million and
$3.0 million in the aggregate between the three affordable housing investment funds. In addition, the Company has recognized no
gains or losses from the funds.
Note 10 – Related Party Transactions
The Company has granted loans to officers and directors of the Company and to their immediate family members as well as loans
to related companies. These related party loans are made on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risk of
collectability. Set forth below is a summary of the related loan activity.
(Dollars in thousands)
December 31, 2020
December 31, 2019
Balance at
Beginning of
Year
Borrowings
Executive
Officer and
Director
Retirements
Repayments
Balance at
End of Year
$
$
12,284 $
24,453 $
(8,187) $
(1,127) $
27,423
27,971 $
13,897 $
— $
(29,584) $
12,284
The Company held related party deposits of $73.8 million and $35.5 million at December 31, 2020 and December 31, 2019,
respectively.
The Company held no related party repurchase agreements at December 31, 2020 and December 31, 2019.
Note 11 – Pension Plan
The Company participates in a trusteed pension plan known as the Allegheny Group Retirement Plan covering virtually all full-
time employees. Benefits are based on years of service and the employee’s compensation. Accruals under this plan were frozen as
of May 31, 2014. Freezing the plan resulted in a re-measurement of the pension obligations and plan assets as of the freeze date.
The pension obligation was re-measured using the discount rate based on the Citigroup Above Median Pension Discount Curve in
effect on May 31, 2014 of 4.46%.
On June 19, 2017, the Company approved a Supplemental Executive Retirement Plan (“SERP”), pursuant to which the Chief
100
Executive Officer of PMG is entitled to receive certain supplemental nonqualified retirement benefits. The SERP took effect on
December 31, 2017. If the executive completes three years of continuous employment prior to retirement date (which shall be no
earlier than the date he attains age 55) he will, upon retirement, be entitled to receive $1.8 million payable in 180 equal
consecutive installments of $10 thousand. The liability is calculated by discounting the anticipated future cash flows at 4.0%. The
liability accrued for this obligation was $1.2 million and $0.8 million as of December 31, 2020 and 2019, respectively. Service
cost was $0.2 million and $0.4 million in 2020 and 2019, respectively.
Pension expense was $0.3 million, $0.3 million and $0.3 million in 2020, 2019 and 2018, respectively.
Information pertaining to the activity in the Company’s defined benefit plan, using the latest available actuarial valuations with a
measurement date of December 31, 2020 and 2019 is as follows:
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year
Interest cost
Actuarial loss
Assumption changes
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of year
Funded status
Unrecognized net actuarial loss
Prepaid pension cost recognized
Accumulated benefit obligation
2020
2019
11,435 $
365
(54)
1,255
(286)
12,715 $
6,165 $
511
706
(286)
7,096 $
(5,619) $
6,591
972 $
9,416
392
99
1,769
(241)
11,435
5,238
808
360
(241)
6,165
(5,270)
5,883
613
12,715 $
11,435
$
$
$
$
$
$
$
At December 31, 2020, 2019 and 2018, the weighted-average assumptions used to determine the benefit obligation are as follows:
Discount rate
Rate of compensation increase
The components of net periodic pension cost are as follows:
(Dollars in thousands)
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Net periodic pension cost
2020
2019
2018
2.50 %
N/A
3.24 %
N/A
4.23 %
N/A
2020
2019
2018
$
$
365 $
(438)
420
347 $
392 $
(407)
271
256 $
352
(372)
306
286
101
For the years December 31, 2020, 2019 and 2018, the weighted-average assumptions used to determine net periodic pension cost
are as follows:
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
2020
2019
2018
2.50 %
6.75 %
N/A
3.24 %
6.75 %
N/A
3.55 %
6.75 %
N/A
The Company’s pension plan asset allocations at December 31, 2020 and 2019 are as follows:
Plan Assets
Cash
Fixed income
Alternative investments
Domestic equities
Foreign equities
Real estate investment trusts
Total
2020
2019
9 %
20 %
19 %
27 %
24 %
1 %
100 %
4 %
23 %
15 %
33 %
24 %
1 %
100 %
The estimated net loss for the plan that is expected to be amortized from accumulated other comprehensive income into net
periodic benefit cost over the next fiscal year is $0.5 million.
The following table sets forth by level within the fair value hierarchy, as defined in Note 18 – Fair Value Measurements, the
Pension Plan’s assets at fair value as of December 31, 2020.
(Dollars in thousands)
Assets:
Cash
Fixed income
Alternative investments
Domestic equities
Foreign equities
Real estate investment trusts
Level I
Level II
Level III
Total
$
639 $
1,419
—
1,916
1,703
—
— $
—
—
—
—
—
— $
—
1,348
—
—
71
Total assets at fair value
$
5,677 $
— $
1,419 $
639
1,419
1,348
1,916
1,703
71
7,096
The following table sets forth by level, within the fair value hierarchy, as defined in Note 18 – Fair Value Measurements, the
Pension Plan’s assets at fair value as of December 31, 2019.
Level I
Level II
Level III
Total
(Dollars in thousands)
Assets:
Cash
Fixed income
Alternative investments
Domestic equities
Foreign equities
Real estate investment trusts
$
247 $
1,418
—
2,034
1,480
—
— $
—
—
—
—
—
— $
— $
—
925
—
—
61
986 $
247
1,418
925
2,034
1,480
61
6,165
Total assets at fair value
$
5,179 $
Investment in government securities and short-term investments are valued at the closing price reported on the active market on
which the individual securities are traded. Alternative investments and investment in debt securities are valued at quoted prices
which are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of
which can be directly observed. The methods described above may produce a fair value calculation that may not be indicative of
net realizable value or reflective of future fair values. Furthermore, while this plan believes its valuation methods are appropriate
and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different fair value measurement at the reporting date.
102
The following table includes the Company's best estimate of the plan contribution for next fiscal year and the benefits expected to
be paid in each of the next five fiscal years and in the aggregate for the five fiscal years thereafter.
(Dollars in thousands)
Contributions for the period of January 1, 2021 through December 31, 2021
Estimated future benefit payments reflecting expected future service
2021
2022
2023
2024
2025
2026 through 2030
Cash Flow
199
344
407
423
445
508
2,652
$
$
$
$
$
$
$
Note 12 – Goodwill and Other Intangible Assets
The table below summarizes the changes in carrying amounts of goodwill and other intangibles, including core deposit
intangibles, for the periods presented:
(Dollars in thousands)
Balance at January 1, 2020
Reduction of goodwill and intangibles from sale of branches to Summit
Intangibles resulting from First State acquisition
Reduction of goodwill from ICM transaction
Goodwill resulting from Paladin acquisition
Amortization expense
Balance at December 31, 2020
Balance at January 1, 2019
Goodwill and intangibles resulting from Chartwell acquisition
Amortization expense
Balance at December 31, 2019
Balance at January 1, 2018
Amortization expense
Balance at December 31, 2018
Intangibles
Accumulated
Depreciation
Gross
4,226 $
(845)
560
—
—
—
3,941 $
(753) $
441
—
—
—
(1,229)
(1,541) $
Net
3,473
(404)
560
—
—
(1,229)
2,400
Goodwill
$ 19,630 $
(1,598)
—
(16,882)
1,200
—
2,350 $
$
$ 18,480 $
1,150
—
$ 19,630 $
1,006 $
3,220
—
4,226 $
(456) $
—
(297)
(753) $
550
3,220
(297)
3,473
$ 18,480 $
—
$ 18,480 $
1,006 $
—
1,006 $
(360) $
(96)
(456) $
646
(96)
550
Goodwill represents the excess of the purchase price over the fair value of acquired net assets under the acquisition method of
accounting. Intangibles represent the core deposit intangibles from the acquisition of First State in 2020 and the intangibles
resulting from the Chartwell and Paladin acquisitions. The value of the acquired core deposit relationships was determined using
the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the
acquired deposit base. The core deposit intangibles were being amortized over a ten-year period using an accelerated method. The
intangibles resulting from the Chartwell acquisition are related to their customer relationships, backlog, a trademark and a non-
competition agreement. These items are amortized over five years, 5.3 years, 15 years and four years, respectively.
103
The table below presents estimated amortization expense for the Company’s other intangible assets (dollars in thousands):
2021
2022
2023
2024
2025
Thereafter
$
$
616
616
507
235
47
379
2,400
The Company’s assessment of qualitative factors determined that it is not more likely than not that the fair value of each reporting
unit is less than its carrying amount and therefore, goodwill is not impaired as of December 31, 2020 and 2019. The Company has
not identified any triggering events since the impairment evaluation that would indicate potential impairment.
Intangibles, including core deposit intangibles are evaluated for impairment if events and circumstances indicate a potential for
impairment. Such an evaluation of other intangible assets is based on undiscounted cash flow projections. No impairment charges
were recorded for other intangible assets in any of the periods presented.
Note 13 – Stock Offerings
In August 2019, the Board of Directors of the Company announced the approval of a stock repurchase program, of which 49,100
shares were repurchased for $0.7 million at an average price of $14.52 per share, between March 2020 and July 2020. In August
2020, the Board of Directors of the Company announced the approval of an extension of the existing stock repurchase program.
Under the extended program, the Company is authorized to repurchase up to $5.0 million of its outstanding shares of common
stock over the next 12 months or until the aggregate share repurchases are completed, whichever date comes first, on the open
market or in privately negotiated transactions. The stock repurchase program does not require the Company to repurchase any
specified number of shares of its common stock, and it may be discontinued, suspended or restarted at any time at the Company's
discretion. From August 2020 through November 2020, the Company purchased an additional 210,824 shares for $3.5 million at
an average price of $15.93 per share.
In December 2020, the Company repurchased 536,490 shares of its common stock at a price of $20.25 per share via a modified
“Dutch auction” tender offer. Additionally, the Company’s Board of Directors authorized the repurchase from time to time, on or
before December 31, 2021, of up to $31.9 million of shares of the Company’s common stock as part of the Company’s stock
repurchase program, which repurchases may occur from time to time, on the open market or otherwise, at such prices and upon
such terms as the Company may determine and otherwise in accordance with applicable law.
Note 14 – Stock Options and Other Equity Awards
The MVB Financial Corp. Incentive Stock Plan (the “Plan”) provides for the issuance of stock options, restricted stock awards
and RSUs to selected employees and directors. As of December 31, 2020, the Plan had 3.2 million shares authorized and 569,997
shares remaining available for issuance. To date, the Company has awarded both stock options and RSUs to selected employees
and directors.
Stock-Based Compensation Expense
Stock-based compensation expense is recognized as salary and employee benefit cost the fair value of the instruments on the date
of the grant. The amount that the Company recognized in stock-based compensation expense related to the issuance of stock
options and RSUs is presented in the following table:
(Dollars in thousands)
Stock Options
RSUs
Total Stock-based compensation expense
$
$
2020
2019
2018
950 $
1,403
2,353 $
873 $
886
1,759 $
936
331
1,267
Proceeds from stock options exercised were $4.5 million, $2.2 million and $2.1 million during 2020, 2019 and 2018, respectively.
During 2020, 2019 and 2018, certain options were exercised in cashless transactions. Shares were forfeited related to exercise
price and related tax obligations and the Company paid tax authorities amounts due resulting in a net cash outflow.
104
Stock Options
Under the provisions of the Plan, the option price per share shall not be less than the fair market value of the common stock on the
date of the grant. Stock options expire ten years from the date of the grant. With the exception of 125,000 shares granted in 2017
that vest in four years and expire in ten years, all options granted vest in five years and expire ten years from the date of the grant.
The following summarizes stock options as of and for the year ended December 31, 2020 and 2019 and the changes for the years
then ended:
2020
Number of Shares
Weighted-Average Exercise
Price
Outstanding at beginning of year
Granted
Exercised
Forfeited
Expired
Outstanding at end of year
Exercisable at end of year
Weighted-average fair value of options granted during 2020
Weighted-average fair value of options granted during 2019
Weighted-average fair value of options granted during 2018
1,593,241 $
126,250
(305,697)
(9,750)
(7,250)
1,396,794 $
947,988 $
$
$
$
14.96
18.11
14.36
16.85
14.78
15.36
14.66
4.48
4.22
5.97
The intrinsic value of options exercised during 2020, 2019 and 2018 was $1.9 million, $1.9 million and $0.9 million, respectively.
The fair value for the options was estimated at the date of grant using a Black-Scholes option-pricing model with the following
inputs:
Average risk-free interest rates
Weighted-average life
Expected volatility
Expected dividend yield
2020
2019
2018
0.66 %
seven years
30.9 %
2.20 %
2.02 %
seven years
21.8 %
0.84 %
2.81 %
seven years
18.6 %
0.54 %
The following summarizes information related to the total outstanding and exercisable stock options at December 31, 2020:
Options Outstanding
Options Exercisable
Total Options
Weighted-
Average
Exercise Price
Intrinsic Value
(in millions)
Weighted-
Average
Remaining Life
Total Options
Weighted-
Average
Exercise Price
Intrinsic Value
(in millions)
Weighted-
Average
Remaining Life
1,396,794
$15.36
$10.2
5.64
947,988
$14.66
$7.6
4.80
At December 31, 2020, based on stock options outstanding at that time, the total unrecognized pre-tax compensation expense
related to unvested stock options was $1.3 million. This cost is expected to be recognized over a weighted-average period of 2.9
years. At December 31, 2020, the fair value of stock options vested during the year was $0.9 million.
Restricted Stock Units
Under the provisions of the Plan, RSUs are similar to restricted stock awards, except the recipient does not receive the stock
immediately, but instead receives it according to a vesting plan and distribution schedule after achieving required performance
milestones or upon remaining with the Company for a particular length of time. Each RSU that vests entitles the recipient to
receive one share of the Company’s common stock on a specified issuance date. The recipient does not have any stockholder
rights, including voting, dividend or liquidation rights, with respect to the shares underlying awarded RSUs until the recipient
becomes the record holder of those shares.
105
The Company granted 153,642 RSUs in 2020, 97,911 of which were time-based awards and 55,731 of which were performance-
based awards. Time-based RSUs granted in 2020 vest in five equal installments per year over a five-year period, with the
exception of time-based grants to members of the board of directors, which vest over a one-year period. Performance-based RSUs
vest in one installment at the end of three years, based on set criteria.
A summary of the activity for the Company’s RSUs for the period indicated is presented in the following table:
Balance at beginning of year
Granted
Vested
Forfeited
Balance at end of year
Weighted-average fair value of RSUs granted during 2020
Weighted-average fair value of RSUs granted during 2019
Weighted-average fair value of RSUs granted during 2018
2020
Shares
Weighted-Average Grant
Date Fair Value
160,758 $
153,642
(53,981)
(7,383)
253,036 $
$
$
$
16.67
13.08
15.36
16.55
14.70
13.08
15.50
19.33
At December 31, 2020, based on RSU awards outstanding at that time, the total unrecognized pre-tax compensation expense
related to unvested RSU awards was $2.3 million. This cost is expected to be recognized over a weighted-average period of 2.8
years. At December 31, 2020, the fair value of RSU awards vested during the year was $0.8 million.
Note 15 – Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. The Bank is
required to comply with applicable capital adequacy standards established by the FDIC. The Company is exempt from the Federal
Reserve Board’s capital adequacy standards as it believes it meets the requirements of the Small Bank Holding Company Policy
Statement. West Virginia state chartered banks, such as the Bank, are subject to similar capital requirements adopted by the West
Virginia Division of Financial Institutions.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and
ratios of Total capital, Tier 1 capital and Tier 1 common equity to risk-weighted assets, and of Tier 1 capital to average assets, as
defined. As of December 31, 2020 and 2019, the Company and the Bank meet all capital adequacy requirements to which they are
subject.
The most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier
1 common equity risk-based and Tier 1 leverage ratios as set forth in the table below. Both the Company’s and the Bank’s actual
capital amounts and ratios are presented in the table below.
106
(Dollars in thousands)
As of December 31, 2020
Total Capital (to risk-weighted assets)
Actual
Minimum Capital
Requirement
Minimum to be Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Subsidiary Bank
$
273,318
15.8%
$
138,277
8.0%
$
172,846
10.0%
Tier 1 Capital (to risk-weighted assets)
Subsidiary Bank
$
251,565
14.6%
$
103,708
6.0%
$
138,277
8.0%
Common Equity Tier 1 Capital (to risk-weighted assets)
Subsidiary Bank
Tier 1 Capital (to average assets)
Subsidiary Bank
As of December 31, 2019
Total Capital (to risk-weighted assets)
$
251,565
14.6%
$
251,565
11.0%
$
$
77,781
4.5%
$
112,350
6.5%
91,269
4.0%
$
114,086
5.0%
Subsidiary Bank
$
201,672
12.8%
$
125,686
8.0%
$
157,107
10.0%
Tier 1 Capital (to risk-weighted assets)
Subsidiary Bank
$
189,365
12.1%
Common Equity Tier 1 Capital (to risk-weighted assets)
Subsidiary Bank
Tier 1 Capital (to average assets)
Subsidiary Bank
$
189,365
12.1%
$
189,365
9.9%
$
$
$
94,264
6.0%
$
125,686
8.0%
70,698
4.5%
$
102,120
6.5%
76,182
4.0%
$
95,227
5.0%
Note 16 – Regulatory Restriction on Dividends
The approval of the regulatory agencies is required if the total of all dividends declared by the Bank in any calendar year exceeds
the Bank’s net profits, as defined, for that year combined with its retained net profits for the preceding two calendar years.
107
Note 17 – Fair Value of Financial Instruments
The carrying values and estimated fair values of financial instruments are summarized as follows:
Fair Value Measurements at:
(Dollars in thousands)
December 31, 2020
Financial assets:
Cash and cash equivalents
Certificates of deposit with banks
Securities available-for-sale
Equity securities
Loans held-for-sale
Loans
Mortgage servicing rights
Interest rate swap
Accrued interest receivable
Fair value hedge
Bank-owned life insurance
Financial liabilities:
Deposits
Repurchase agreements
Fair value hedge
Interest rate swap
Accrued interest payable
Subordinated debt
December 31, 2019
Financial assets:
Cash and cash equivalents
Certificates of deposits with banks
Securities available-for-sale
Equity securities
Loans held-for-sale
Loans
Mortgage servicing rights
Interest rate lock commitment
Interest rate swap
Fair value hedge
Accrued interest receivable
Bank-owned life insurance
Financial liabilities:
Deposits
Repurchase agreements
FHLB and other borrowings
Mortgage-backed security hedges
Fair value hedge
Interest rate swap
Accrued interest payable
Subordinated debt
Carrying Value
Estimated Fair
Value
Quoted Prices in
Active Markets
for Identical
Assets (Level I)
Significant Other
Observable
Inputs (Level II)
Significant
Unobservable
Inputs (Level III)
$
263,893 $
263,893 $
11,803
410,624
27,585
1,062
1,427,900
2,942
13,822
7,793
2,215
41,262
11,986
410,624
27,585
1,062
1,434,275
2,942
13,822
7,793
2,215
41,262
263,893 $
—
—
472
—
—
—
—
—
—
—
— $
11,986
366,945
—
1,062
—
—
13,822
2,770
2,215
41,262
—
—
43,679
27,113
—
1,434,275
2,942
—
5,023
—
—
$
$
$
1,982,389 $
10,266
2,141
13,822
572
43,407
1,964,860 $
10,266
2,141
13,822
572
45,536
— $
—
—
—
—
—
1,964,860 $
10,266
2,141
13,822
572
45,536
—
—
—
—
—
—
28,002 $
12,549
235,821
18,514
109,788
1,362,766
348
1,660
5,722
1,770
7,909
35,374
1,265,042 $
10,172
222,885
186
1,418
5,722
1,060
4,124
28,002 $
12,586
235,821
18,514
109,788
1,364,706
348
1,660
5,722
1,770
7,909
35,374
1,249,135 $
10,172
222,891
186
1,418
5,722
1,060
4,124
28,002 $
—
—
—
—
—
—
—
—
—
—
—
— $
12,586
198,562
—
109,788
—
—
—
5,722
1,770
1,592
35,374
—
—
37,259
18,514
—
1,364,706
348
1,660
—
—
6,317
—
— $
—
—
—
—
—
—
—
1,249,135 $
10,172
222,891
186
1,418
5,722
1,060
4,124
—
—
—
—
—
—
—
108
Note 18 – Fair Value Measurements
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument.
These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire
holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial
instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates. Fair value estimates are based on existing on-and-off balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not
considered financial instruments.
Assets Measured on a Recurring Basis
As required by accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement. The Company classified investments in government securities as Level II
instruments and valued them using the market approach. The following measurements are made on a recurring basis.
Available-for-sale investment securities — Available-for-sale investment securities are recorded at fair value on a recurring
basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are
measured using independent pricing models or other model-based valuation techniques such as the present value of future cash
flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level I
securities include those traded on an active exchange, such as the New York Stock Exchange, United States Treasury securities
that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level II securities include
mortgage-backed securities issued by government sponsored entities and private label entities, municipal bonds and corporate
debt securities. There have been no changes in valuation techniques for the year ended December 31, 2020. Valuation techniques
are consistent with techniques used in prior periods. Certain local municipal securities related to tax increment financing (“TIF”)
are independently valued and classified as Level III instruments.
Equity securities — Certain equity securities are recorded at fair value on a nonrecurring basis. Fair value measurement is based
upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or
other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating,
prepayment assumptions and other factors such as credit loss assumptions. The valuation methodologies utilized may include
significant unobservable inputs.
Loans held-for-sale — The fair value of mortgage loans held-for-sale is determined, when possible, using quoted secondary-
market prices or investor commitments. If no such quoted price exists, the fair value of a loan is determined using quoted prices
for a similar asset or assets, adjusted for the specific attributes of that loan, which would be used by other market participants.
Interest rate lock commitment — The Company estimates the fair value of interest rate lock commitments based on the value of
the underlying mortgage loan, quoted mortgage-backed security prices and estimates of the fair value of the mortgage servicing
rights and the probability that the mortgage loan will fund within the terms of the interest rate lock commitments.
Mortgage-backed security hedges — Mortgage-backed security hedges are considered derivatives and are recorded at fair value
based on observable market data of the individual mortgage-backed security.
Interest rate swap — Interest rate swaps are recorded at fair value based on third-party vendors who compile prices from various
sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market
data.
Fair value hedge — Treated like an interest rate swap, fair value hedges are recorded at fair value based on third-party vendors
who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models
that consider observable market data.
109
The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a
recurring basis as of December 31, 2020 and 2019 by level within the fair value hierarchy.
(Dollars in thousands)
Assets:
United States government agency securities
United States sponsored mortgage-backed securities
Municipal securities
Other securities
Equity securities
Loans held-for-sale
Interest rate swap
Fair value hedge
Liabilities:
Interest rate swap
Fair value hedge
(Dollars in thousands)
Assets:
United States government agency securities
United States sponsored mortgage-backed securities
Municipal securities
Other securities
Loans held-for-sale
Interest rate lock commitment
Interest rate swap
Fair value hedge
Liabilities:
Interest rate swap
Fair value hedge
Mortgage-backed security hedges
$
$
December 31, 2020
Level I
Level II
Level III
Total
— $
—
—
—
472
—
—
—
56,992 $
95,769
188,208
18,476
—
1,062
13,822
2,215
— $
—
43,679
—
—
—
—
—
—
—
13,822
2,141
—
—
56,992
95,769
231,887
18,476
472
1,062
13,822
2,215
13,822
2,141
December 31, 2019
Level I
Level II
Level III
Total
— $
—
—
—
—
—
—
—
—
—
—
51,996 $
58,312
75,833
12,421
109,788
—
5,722
1,770
5,722
1,418
186
— $
—
37,259
—
—
1,660
—
—
—
—
—
51,996
58,312
113,092
12,421
109,788
1,660
5,722
1,770
5,722
1,418
186
110
The following table represents recurring Level III assets:
(Dollars in thousands)
Balance at December 31, 2019
Realized and unrealized gains (losses) included in earnings
Purchase of securities
Maturities/calls
Unrealized gain included in other comprehensive income
(loss)
Unrealized loss included in other comprehensive income
(loss)
Balance at December 31, 2020
Balance at December 31, 2018
Realized and unrealized losses included in earnings
Purchase of securities
Reclassification to nonrecurring assets
Maturities/calls
Unrealized gain included in other comprehensive income
(loss)
Unrealized loss included in other comprehensive income
(loss)
Balance at December 31, 2019
Assets Measured on a Nonrecurring Basis
Interest Rate Lock
Commitments
Municipal
Securities
Equity Securities
Total
$
$
$
$
1,660 $
(1,660)
—
—
37,259 $
3
22,228
(15,778)
— $
—
—
—
38,919
(1,657)
22,228
(15,778)
—
7,119
—
7,119
—
— $
(7,152)
43,679 $
1,750 $
(90)
—
—
—
33,122 $
—
842
—
(15,716)
—
34,702
—
— $
300 $
—
—
(300)
—
—
—
1,660 $
(15,691)
37,259 $
—
— $
(7,152)
43,679
35,172
(90)
842
(300)
(15,716)
34,702
(15,691)
38,919
The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets and
non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are
measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-
financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent
impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment
test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-
financial assets measured at fair value on a nonrecurring basis during 2020 and 2019 include certain foreclosed assets which, upon
initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and
certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down
included in other noninterest expense.
Impaired loans — Loans for which it is probable that payment of interest and principal will not be made in accordance with the
contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management
measures impairment using one of several methods, including collateral value, liquidation value and discounted cash flows. Those
impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed
the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable market data or
Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company
obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable
property analysis and contractual sales information.
Other real estate owned — Other real estate owned, which is obtained through the Bank’s foreclosure process, is valued utilizing
the appraised collateral value. Collateral values are estimated using Level II inputs based on observable market data or Level III
inputs based on customized discounting criteria. At the time the foreclosure is completed, the Company obtains a current external
appraisal.
Other debt securities — Certain debt securities are recorded at fair value on a nonrecurring basis. These other debt securities,
which include preferred member interest in an equity method investment, are securities without a readily determinable fair value
and are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly
transactions, as defined, for identical or similar investments of the same issuer.
Equity securities — Certain equity securities are recorded at fair value on a nonrecurring basis. Equity securities without a readily
111
determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price
changes in orderly transactions, as defined, for identical or similar investments of the same issuer.
Assets measured at fair value on a nonrecurring basis as of December 31, 2020 and 2019 are included in the table below:
(Dollars in thousands)
Impaired loans
Other real estate owned
Other debt securities
Equity securities
(Dollars in thousands)
Impaired loans
Other real estate owned
Equity securities
$
$
December 31, 2020
Level I
Level II
Level III
Total
— $
—
—
—
— $
—
—
—
14,098 $
5,730
7,500
27,113
14,098
5,730
7,500
27,113
December 31, 2019
Level I
Level II
Level III
Total
— $
—
—
— $
—
—
8,909 $
1,397
18,514
8,909
1,397
18,514
112
The following tables presents quantitative information about the Level III significant unobservable inputs for assets and liabilities
measured at fair value at December 31, 2020 and 2019.
(Dollars in thousands)
December 31, 2020
Nonrecurring measurements:
Impaired loans
Other real estate owned
Other debt securities
Equity securities
Recurring measurements:
Quantitative Information about Level III Fair Value Measurements
Fair Value
Valuation Technique
Unobservable Input
Range
$
14,098
Appraisal of collateral 1
5,730
Appraisal of collateral 1
Appraisal adjustments 2
Liquidation expense 2
Appraisal adjustments 2
Liquidation expense 2
7,500
Net asset value
Cost minus impairment
27,113
Net asset value
Cost minus impairment
$
$
$
20% - 62%
5% - 10%
20% - 30%
5% - 10%
—%
—%
Municipal securities (Local TIF bonds)
$
43,679
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%
(Dollars in thousands)
December 31, 2019
Nonrecurring measurements:
Impaired loans
Other real estate owned
Quantitative Information about Level III Fair Value Measurements
Fair Value
Valuation Technique
Unobservable Input
Range
$
$
8,909
Appraisal of collateral 1
1,397
Appraisal of collateral 1
Appraisal adjustments 2
Liquidation expense 2
Appraisal adjustments 2
Liquidation expense 2
20% - 62%
5% - 10%
20% - 30%
5% - 10%
Equity securities
$
18,514
Net asset value
Cost minus impairment
—%
Recurring measurements:
Municipal securities (Local TIF bonds)
$
37,259
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%
$
1,660
Pricing model
Interest rate lock commitments
1 Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various
Level III inputs which are not identifiable.
2 Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation
expenses. The range and weighted-average of liquidation expenses and other appraisal adjustments are presented as a percent of
the appraisal.
3 Fair value determined through independent analysis of liquidity, rating, yield and duration.
4 Appraisals may be adjusted for qualitative factors, such as local economic conditions.
Pull through rates
77% - 82%
113
Note 19 – Comprehensive Income
The following tables present the components of accumulated other comprehensive income (“AOCI”) for the years ended
December 31:
(Dollars in thousands)
2020
2019
2018
Amount
Reclassified
from AOCI
Amount
Reclassified
from AOCI
Amount
Reclassified
from AOCI
Consolidated Statement of Income
Line Item
Details about AOCI Components
Available-for-sale securities
Unrealized holding gain (loss)
$
Defined benefit pension plan items
Amortization of net actuarial loss
Investment hedge
Carrying value adjustment
914 $
914
(214)
700
(166) $
(166)
44
(122)
(420)
(420)
98
(322)
473
473
(128)
345
(271)
(271)
73
(198)
(44)
(44)
12
(32)
Gain (loss) on sale of available-for-sale
securities
Total before tax
Income tax expense
Net of tax
Salaries and employee benefits
Total before tax
Income tax expense
Net of tax
Interest on investment securities
Total before tax
Income tax expense
Net of tax
327
327
(88)
239
(306)
(306)
83
(223)
—
—
—
—
16
Total reclassifications
$
723 $
(352) $
(Dollars in thousands)
Balance at January 1, 2020
Other comprehensive income (loss) before reclassification
Amounts reclassified from AOCI
Net current period OCI
Balance at December 31, 2020
Balance at January 1, 2019
Other comprehensive income (loss) before reclassification
Amounts reclassified from AOCI
Net current period OCI
Balance at December 31, 2019
Unrealized gains
(losses) on
available for-sale
securities
Defined benefit
pension plan
items
Investment Hedge
Total
$
$
$
$
2,942 $
5,344
(700)
4,644
7,586 $
(3,384) $
6,204
122
6,326
2,942 $
(4,295) $
(1,074)
322
(752)
(5,047) $
(3,422) $
(1,071)
198
(873)
(4,295) $
32 $
—
(345)
(345)
(313) $
— $
—
32
32
32 $
(1,321)
4,270
(723)
3,547
2,226
(6,806)
5,133
352
5,485
(1,321)
114
Note 20 – Condensed Financial Statements of Parent Company
Information relative to the parent company’s condensed balance sheets at December 31, 2020 and 2019 and the related condensed
statements of income and cash flows for the years ended December 31, 2020, 2019 and 2018 are presented below:
Condensed Balance Sheets
(Dollars in thousands)
Assets
Cash
Investment in subsidiaries
Other assets
Total assets
Liabilities and stockholders’ equity
Other liabilities
Subordinated debt
Total liabilities
Total stockholders’ equity
Total liabilities and stockholders’ equity
Condensed Statements of Income
(Dollars in thousands)
Income, dividends from Bank subsidiary
Operating expenses
Loss from continuing operations, before income taxes
Income tax benefit - continuing operations
Net loss from continuing operations
Income from discontinued operations, before income taxes
Income tax expense - discontinued operations
Net income from discontinued operations
Equity in undistributed income earnings of subsidiaries
Net income
Preferred dividends
Net income available to common shareholders
December 31,
2020
2019
15,566 $
265,679
6,077
287,322 $
1,058
211,271
6,397
218,726
4,432 $
43,407
47,839
2,666
4,124
6,790
239,483
287,322 $
211,936
218,726
$
$
$
$
Year ended December 31,
2020
2019
2018
$
6,688 $
16,804
(10,116)
(2,082)
(8,034)
—
—
—
45,445
37,411 $
6,280 $
14,296
(8,016)
(1,880)
(6,136)
575
148
427
32,700
26,991 $
8,906
13,439
(4,533)
(1,569)
(2,964)
—
—
—
14,967
12,003
461 $
36,950 $
479 $
26,512 $
489
11,514
$
$
$
115
Condensed Statements of Cash Flows
(Dollars in thousands)
OPERATING ACTIVITIES
Net income
Equity in undistributed earnings of subsidiaries
Stock-based compensation
Other assets
Other liabilities
2020
2019
2018
$
37,411 $
(45,445)
2,353
(2,101)
1,767
26,991 $
(32,700)
1,759
(4,104)
344
12,003
(14,967)
1,267
1,997
1,311
Net cash from operating activities
(6,015)
(7,710)
1,611
INVESTING ACTIVITIES
Investment in subsidiaries
(2,982)
16,791
(2,194)
Net cash from investing activities
(2,982)
16,791
(2,194)
FINANCING ACTIVITIES
Proceeds from stock issuance
AOCI reclassification of pension and available-for-sale investments
Subordinated debt issuance (redemption)
Common stock repurchased
Preferred stock redemption
Common stock options exercised
Cash dividends paid on common stock
Cash dividends paid on preferred stock
240
—
40,000
(15,746)
—
4,464
(4,275)
(461)
1,033
—
(12,400)
—
(500)
2,164
(2,290)
(479)
—
743
(35)
—
—
2,129
(1,220)
(489)
Net cash from financing activities
24,222
(12,472)
1,128
Net change in cash
Cash at beginning of period
Cash at end of period
Noncash common stock converted from subordinated debt
Note 21 – Segment Reporting
15,225
(3,391)
545
1,058
4,449
3,904
16,283 $
1,058 $
4,449
— $
1,000 $
15,965
$
$
The Company has identified three reportable segments: CoRe banking; mortgage banking; and financial holding company.
Revenue from CoRe banking activities consists primarily of interest earned on loans and investment securities and service charges
on deposit accounts. The Fintech division, Chartwell and Paladin Fraud reside in the CoRe banking segment. Revenue from the
mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage loan origination
process. Prior to July 1, 2020, the mortgage banking services were conducted by PMG. In July 2020, the Company announced the
completion of PMG’s combination with Intercoastal to form ICM. The Company has recognized its ownership as an equity
method investment, initially recorded at fair value. Income related to this equity method investment is included in the Mortgage
Banking segment. Revenue from financial holding company activities is mainly comprised of intercompany service income and
dividends.
116
Information about the reportable segments and reconciliation to the consolidated financial statements for the years ended
December 31, 2020, 2019 and 2018 are as follows:
(Dollars in thousands)
Interest income
Interest expense
Net interest income (loss)
Provision for (recovery of) loan losses
Net interest income after provision for loan losses
Noninterest Income:
Mortgage fee income
Other income
Total noninterest income
Noninterest Expenses:
Salaries and employee benefits
Other expenses
Total noninterest expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Preferred stock dividends
Net income (loss) available to common shareholders
Capital Expenditures for the year ended December 31, 2020
Total Assets as of December 31, 2020
Goodwill as of December 31, 2020
CoRe
Banking
Mortgage
Banking
2020
Financial
Holding
Company
Intercompany
Eliminations
Consolidated
$
75,812 $
6,269 $
3 $
(1,631) $
10,400
65,412
16,649
48,763
247
30,082
30,329
28,801
33,298
62,099
16,993
1,752
3,139
3,130
(70)
3,200
33,722
29,768
63,490
21,550
5,074
26,624
40,066
9,862
261
(258)
—
(258)
—
6,685
6,685
11,278
5,265
16,543
(10,116)
(2,082)
(2,173)
542
—
542
(542)
(8,125)
(8,667)
—
(8,125)
(8,125)
—
—
80,453
11,627
68,826
16,579
52,247
33,427
58,410
91,837
61,629
35,512
97,141
46,943
9,532
$
$
$
15,241 $
30,204 $
(8,034) $
— $
37,411
—
—
461
—
461
15,241 $
30,204 $
(8,495) $
— $
36,950
6,439 $
99 $
77 $
— $
6,615
2,343,556
58,140
284,943
(355,163)
2,331,476
2,350
—
—
—
2,350
117
(Dollars in thousands)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income:
Mortgage fee income
Other income
Total noninterest income
Noninterest Expenses:
Salaries and employee benefits
Other expenses
Total noninterest expenses
Income (loss) from continuing operations, before income
taxes
Income tax expense (benefit) - continuing operations
Net income (loss) from continuing operations
Income from discontinued operations, before income taxes
Income tax expense - discontinued operations
Net income from discontinued operations
Net income (loss)
Preferred stock dividends
Net income (loss) available to common shareholders
Capital Expenditures for the year ended December 31, 2019
Total Assets as of December 31, 2019
Goodwill as of December 31, 2019
$
$
CoRe
Banking
Mortgage
Banking
2019
Financial
Holding
Company
Intercompany
Eliminations
Consolidated
$
75,874 $
8,342 $
13 $
(1,868) $
18,698
57,176
1,622
55,554
657
23,033
23,690
19,067
25,070
44,137
35,107
8,175
26,932
—
—
—
26,932
—
6,014
2,328
167
2,161
41,040
1,289
42,329
28,432
8,136
36,568
7,922
2,155
5,767
—
—
—
5,767
—
769
(756)
—
(756)
—
6,268
6,268
8,676
4,851
13,527
(8,015)
(1,880)
(6,135)
575
148
427
(5,708)
479
(2,520)
652
—
652
(652)
(7,031)
(7,683)
—
(7,031)
(7,031)
—
—
—
—
—
—
—
—
82,361
22,961
59,400
1,789
57,611
41,045
23,559
64,604
56,175
31,026
87,201
35,014
8,450
26,564
575
148
427
26,991
479
26,932 $
5,767 $
(6,187) $
— $
26,512
1,438 $
112 $
492 $
— $
2,042
1,953,975
2,748
248,382
16,882
216,411
(474,564)
1,944,114
—
—
19,630
118
(Dollars in thousands)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income:
Mortgage fee income
Other income
Total noninterest income
Noninterest Expenses:
Salaries and employee benefits
Other expenses
Total noninterest expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Preferred stock dividends
Net income (loss) available to common shareholders
Capital Expenditures for the year ended December 31, 2018
Note 22 – Quarterly Financial Data (Unaudited)
CoRe
Banking
Mortgage
Banking
2018
Financial
Holding
Company
Intercompany
Eliminations
Consolidated
$
63,762 $
6,667 $
5 $
(674) $
13,667
50,095
2,386
47,709
585
6,479
7,064
14,924
20,081
35,005
19,768
4,265
4,085
2,582
54
2,528
32,880
(243)
32,637
23,927
8,608
32,535
2,630
677
1,756
(1,751)
—
(1,751)
—
6,411
6,411
7,373
4,309
11,682
(7,022)
(1,569)
(1,802)
1,128
—
1,128
(1,128)
(6,344)
(7,472)
—
(6,344)
(6,344)
—
—
69,760
17,706
52,054
2,440
49,614
32,337
6,303
38,640
46,224
26,654
72,878
15,376
3,373
$
$
$
15,503 $
1,953 $
(5,453) $
— $
12,003
—
—
489
—
489
15,503 $
1,953 $
(5,942) $
— $
11,514
2,284 $
272 $
137 $
— $
2,693
(Dollars in thousands)
2020
First quarter
Second quarter
Third quarter
Fourth quarter
(Dollars in thousands)
2019
First quarter
Second quarter
Third quarter
Fourth quarter
Interest
Income
Net Interest
Income
Income
Before Taxes
Net Income
Basic
Diluted
Earnings Per Share
20,699 $
21,774
18,627
19,353
16,171 $
18,458
16,510
17,687
1,227 $
24,042
8,512
13,162
1,048 $
18,034
6,491
11,838
0.08 $
1.50
0.53
1.00
0.08
1.49
0.53
0.97
Interest
Income
Net Interest
Income
Income
Before Taxes
Net Income
Basic
Diluted
Earnings Per Share
19,623 $
20,470
21,038
21,230
13,972 $
14,529
15,034
15,865
3,989 $
20,526
5,668
5,406
3,192 $
15,377
4,327
4,095
0.26 $
1.31
0.36
0.34
0.26
1.18
0.35
0.32
$
$
Note 24 – Acquisitions and Divestitures
The First State Bank Acquisition
In April 2020, the Bank entered into a Purchase and Assumption Agreement with the FDIC, as receiver for First State, providing
119
for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. This was deemed
to be a strategic opportunity to acquire deposits and certain assets of an institution that operated in counties contiguous to the
Company's Southern WV market and further solidified the strategy for growth within core commercial markets. The Company
has accounted for this acquisition under the acquisition method of accounting in accordance with FASB ASC Topic 805, Business
Combinations, whereby the assets acquired and liabilities assumed were recorded by the Company at their estimated fair values as
of their acquisition date. Fair value estimates were based on management's acceptance of a fair market valuation analysis
performed by an independent third-party firm.
In first quarter 2020, the Bank submitted a bid to the FDIC which included a bid based upon acquiring loans at a discounted
amount, and also assuming the deposits of First State with no deposit premium. The Bank was notified that it was the winning
bidder in the process, and the net asset discount accepted by the FDIC was $33.2 million. Immediately after the closing of this
transaction, the FDIC remitted these funds to the Bank. As part of this transaction, the Bank acquired three branch locations for
aggregate consideration of approximately $1.5 million. Also included was other real estate owned (“OREO”) at 46.5% of the
book value, along with deposits with an aggregate value of approximately $140.0 million, cash and investment securities of
$37.0 million and loans with a book value of $83.5 million. Net proceeds received from the FDIC for the transaction were
$39.6 million.
Management made significant estimates and exercised significant judgement in accounting for the acquisition of First State.
Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows,
prepayment speeds and estimated loss factors to measure fair values for the acquired loans. Premises and equipment was valued
based on recent appraised values. Management used quoted or current market prices to determine the fair value of investment
securities. These values are subject to change based on continued evaluations of appraisals and other loan-related assumptions.
The statement of net assets acquired and the resulting bargain purchase gain recorded is presented in the following tables. As
explained in the notes that accompany the following table, the assets acquired and liabilities assumed were recorded at the
acquisition date fair value.
As recorded by The
First State Bank
Fair Value
Adjustments
As recorded by MVB
(Dollars in thousands)
Assets
Cash and cash equivalents
Investment securities - available-for-sale, at fair value
Loans
OREO
Premises and equipment, net
Accrued interest receivable and other assets
Total Assets
Liabilities
Deposits - transaction accounts
Deposits - certificates of deposit
Total deposits
FHLB and other borrowings
Accrued interest payable and other liabilities
$
26,053 $
10,964
83,514
22,610
1,582
2,234
—
—
(22,861) (a)
(10,520) (b)
(12) (c)
211
(d)
146,957 $
(33,182)
$
$
70,931 $
69,029
139,960
5,800
411
—
2,560
(e)
2,560
—
—
2,560
$
$
$
$
$
26,053
10,964
60,653
12,090
1,570
2,445
113,775
70,931
71,589
142,520
5,800
411
148,731
(34,956)
Total Liabilities
$
146,171 $
Net identifiable assets acquired over/(under) liabilities assumed
$
786 $
(35,742)
(a) Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired loan portfolio and excludes
the allowance for loan losses recorded by First State.
(b) Adjustment reflects the fair value of OREO acquired.
(c) Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment.
(d) Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts and the fair value adjustment
to other assets.
(e) Adjustment arises since the interest rates paid on interest-bearing deposits where higher than rates available in the market on
similar deposits as of the acquisition date.
120
The following table summarizes the assets acquired and liabilities assumed in the First State acquisition as of the acquisition date,
and the pre-tax bargain purchase gain of $4.7 million recognized on the transaction, which is included in gains on acquisition and
divestiture activity in the consolidated statements of income.
(Dollars in thousands)
Assets acquired at fair value:
Cash and cash equivalents
Investment securities - available-for-sale, at fair value
Loans
OREO
Premises and equipment, net
Accrued interest receivable and other assets
Total fair value of assets acquired
Liabilities assumed at fair value:
Deposits
FHLB and other borrowings
Accrued interest payable and other liabilities
Total fair value of liabilities acquired
$
$
$
$
26,053
10,964
60,653
12,090
1,570
2,445
113,775
142,520
5,800
411
148,731
Net assets assumed at fair value
Transaction cash consideration received from the FDIC
Bargain purchase gain, before tax
$
$
(34,956)
39,627
4,671
Acquired Loans
The following table outlines the contractually required payments receivable, cash flows the Company expects to receive, non-
accretable credit adjustments and the accretable yield for all First State loans as of the acquisition date:
(Dollars in thousands)
PCI loans
Purchased performing loans
Other purchased loans
Total
Contractually
Required Payments
Receivable
Non-Accretable
Credit Adjustments
Cash Flows
Expected to be
Collected
Accretable FMV
Adjustments
Carrying Value of
Loans Receivable
$
$
86,823 $
24,842 $
61,981 $
11,746 $
12,818
1,978
2,561
—
10,257
1,978
1,817
—
101,619 $
27,403 $
74,216 $
13,563 $
50,235
8,440
1,978
60,653
The Company recorded all loans acquired at the estimated fair value on the purchase date, with no carryover of the related
allowance for loan losses. On the acquisition date, the Company segmented the loan portfolio into six loan pools: performing
commercial, performing commercial real estate, performing consumer and residential real estate, classified commercial, classified
commercial real estate and classified consumer and residential real estate. Of the 934 loans acquired, 663 were determined to be
of deteriorated credit and were accounted for under ASC 310-30 as PCI loans. The 271 remaining loans acquired were accounted
for under ASC 310-20 as purchased performing loans. Other purchased loans include premium finance loans, credit cards and
overdrawn escrow accounts.
The Company had an independent third-party determine the net discounted value of cash flows on approximately 718 performing
loans totaling $39.5 million. The valuation took into consideration the loans' underlying characteristics, including account types,
remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market
rates, loan to value ratios, loss exposures and remaining balances. These performing loans were segmented into pools based on
loan and payment type and in some cases, risk grade.
The Company established a credit risk-related non-accretable difference of $24.8 million relating to these acquired, credit-
impaired loans, reflected in the recorded net fair value. It further estimated the timing and amount of expected cash flows in
excess of the estimated fair value and established an accretable discount adjustment of $11.7 million at acquisition relating to
121
these impaired loans.
The following table discloses the impact of the acquisition of First State from the acquisition date through December 31, 2020.
This table also presents certain pro forma information (net interest income and noninterest income and net income) as of the First
State acquisition had occurred on January 1, 2019. The pro forma financial information is not necessarily indicative of the results
of operations had the acquisitions been effective as of these dates.
Deal-related costs from the First State acquisition of $1.2 million have been excluded from the 12 month period of 2020 pro
forma information presented below and included in the 12 month period of 2019 pro forma information below. The actual results
and pro forma information were as follows:
(Dollars in thousands)
2020:
Actual First State results included in consolidated statement of income since acquisition date
Supplemental consolidated pro forma as if First State had been acquired January 1, 2019
Year Ended December 31,
Revenue
Net Income
$
$
8,793 $
157,180 $
3,351
34,522
2019:
Supplemental consolidated pro forma as if First State had been acquired January 1, 2019
$
133,429 $
29,290
Paladin, LLC Acquisition
In April 2020, Paladin Fraud, LLC, a newly-formed West Virginia limited liability company and wholly-owned subsidiary of
MVB Bank, entered into an Asset Purchase Agreement by and among Paladin Fraud, Paladin, LLC, a Washington limited liability
company, James Houlihan and Jamon Whitehead. Pursuant to the Purchase Agreement, Paladin Fraud acquired substantially all of
the assets and certain liabilities of Paladin and the purchase price of the transaction consisted of 19,278 unregistered shares of
MVB common stock and an undisclosed amount of cash. Paladin is a respected leader in the fraud prevention industry and has
formed a specialty niche that aligns well with the MVB as a preferred bank for Fintech companies.
Divestiture of Four Eastern Panhandle, WV Branches
In November 2019, the Company entered into a Purchase and Assumption Agreement with Summit, pursuant to which Summit
purchased certain assets and assumed certain liabilities of three Bank branch locations in Berkeley County, WV and one Bank
branch location in Jefferson County, WV. Upon closing, Summit assumed $188.1 million in deposits and acquired $36.8 million
in loans, as well as cash, real property, personal property and other fixed assets. The Company recognized a gain of $9.6 million
related to this transaction and was recorded in noninterest income for the in 2020. The completion of this sale resulted in the
Company exiting the Eastern Panhandle, WV market. The Company closed this transaction in April 2020, and as such, no assets
or liabilities of branches are classified as held-for-sale as of December 31, 2020. The Company recognized a gain on sale of
banking centers of $9.6 million, which is included in gains on acquisition and divestiture activity.
Assets to be acquired and liabilities to be assumed that were classified as held-for-sale as of December 31, 2019 are summarized
as follows:
(Dollars in thousands)
Loans
Premises and equipment, net
Assets of branches held-for-sale
Noninterest-bearing deposits
Interest-bearing deposits
Deposits of branches held-for-sale
Combination with Intercoastal
As of December 31, 2019,
42,916
3,638
46,554
19,251
169,019
188,270
$
$
$
$
In July 2020, the Company completed the combination with Intercoastal to form ICM. The Bank contributed certain of its assets
and in exchange received common units representing 47% of the common interest of ICM, as well as $7.5 million in preferred
units. The Company has recognized its ownership as an equity method investment, initially recorded at fair value. The Company
recognized a gain on this transaction of $3.3 million, which is included in gains on acquisition and divestiture activity.
122
Acquisition of Grand Software
In August 2020, MVB Technology, LLC, a newly formed West Virginia limited liability company and wholly-owned subsidiary
of the Bank, entered into an Asset Purchase Agreement with Invest Forward, Inc., a Delaware corporation doing business as
Grand. Pursuant to the Purchase Agreement, MVB Technology acquired the assets of Grand. The purchase price of the transaction
consisted of cash totaling $1.0 million, plus the conversion of MVB’s note with Invest Forward. As of December 31, 2020, the
assets acquired were recorded in premises and equipment with a balance of $1.3 million.
Note 25 – Subsequent Event
In January 2021, the Company redeemed all of its outstanding shares of series B convertible noncumulative perpetual preferred
stock, par value $1.00 per share, with a liquidation preference of $1,000 per share and all of its outstanding shares of series C
convertible noncumulative perpetual preferred stock, par value $1.00 per share, with a liquidation preference of $1,000 per share,
at a redemption price per share equal to $10,000, plus declared and unpaid dividends of $46.03 per share of series B preferred
stock, and $49.86 per share of series C preferred stock. Upon redemption, the Preferred Stock was no longer outstanding and all
rights with respect to such stock ceased and terminated, except the right to payment of the redemption price.
123
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2020, the Company carried out an evaluation under the supervision and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the results of
this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of December 31, 2020.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the
consolidated financial statements for external purposes in accordance with U.S. GAAP.
As permitted by SEC guidance, management excluded from its assessment the operations of the First State Bank acquisition made
during 2020, which is described in Note 24 – Acquisitions and Divestitures accompanying the consolidated financial statements
included elsewhere in this report. Total assets of First State Bank constituted two percent of total assets and five percent of total
revenue of the consolidated financial statement amounts as of and for the year ended December 31, 2020. Such exclusion was in
accordance with the SEC guidance that an assessment of a recently acquired business may be omitted in management’s report on
internal controls over financial reporting, providing the acquisition took place within twelve months of management’s evaluation.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard
No. 5), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or
employees in the normal course of performing their assigned functions.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020.
Management’s assessment did not identify any material weaknesses in the Company’s internal control over financial reporting.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework in 2013. Because there were no material weaknesses discovered,
management believes that, as of December 31, 2020, the Company’s internal control over financial reporting was effective.
Dixon Hughes Goodman LLP, an independent registered public accounting firm, has audited the consolidated financial statements
included in this Annual Report and has issued a report on the effectiveness of the Company's internal control over financial
reporting, which report is included in Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10-
K.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting during the quarter ended December 31, 2020
that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
124
Date: March 9, 2021
Date: March 9, 2021
/s/ Larry F. Mazza
Larry F. Mazza
President, CEO and Director
(Principal Executive Officer)
/s/ Donald T. Robinson
Donald T. Robinson
Executive Vice President and CFO
(Principal Financial and Accounting Officer)
125
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
This information is omitted from this report pursuant to General Instruction G(3) of Form 10-K as the Company will file with the
SEC its definitive Proxy Statement pursuant to Regulation 14A of the Exchange Act for the 2021 Annual Meeting of Shareholders
(the “Proxy Statement”) not later than 120 days after December 31, 2020. The applicable information appearing in the Proxy
Statement is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is omitted from this report pursuant to General Instruction G(3) of Form 10-K as the Company will file with the
SEC its definitive Proxy Statement not later than 120 days after December 31, 2020. The applicable information appearing in the
Proxy Statement is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This information is omitted from this report (with the exception of the equity compensation plan information, which is disclosed
below) pursuant to General Instruction G(3) of Form 10-K as the Company will file with the SEC its definitive Proxy Statement
not later than 120 days after December 31, 2020. The applicable information appearing in the Proxy Statement is incorporated by
reference.
Equity Compensation Plan Information as of December 31, 2020:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options
(a)
Weighted-average
exercise price of
outstanding options
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a)) (c)
947,988 $
N/A
947,988 $
14.66
N/A
14.66
569,997
N/A
569,997
During 2020, 305,697 stock options under the Company’s equity compensation plan were exercised.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
This information is omitted from this report pursuant to General Instruction G(3) of Form 10-K as the Company will file with the
SEC its definitive Proxy Statement not later than 120 days after December 31, 2020. The applicable information appearing in the
Proxy Statement is incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information is omitted from this report pursuant to General Instruction G(3) of Form 10-K as the Company will file with the
SEC its definitive Proxy Statement not later than 120 days after December 31, 2020. The applicable information appearing in the
Proxy Statement is incorporated by reference.
126
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
The following consolidated financial statements of the registrant and its subsidiaries are filed as part of this report under Item 8 -
Financial Statements and Supplementary Data and Item 9A - Controls and Procedures.
(a)(1) Financial Statements
Report of Independent Registered Public Accounting Firm Opinion on the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm Opinion on Internal Control over Financial Reporting
Consolidated Balance Sheets at December 31, 2020 and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Management’s Annual Report on Internal Control over Financial Reporting
(b)
Exhibits
Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, please refer to the
“Exhibit Index” below. The Exhibit Index specifically identifies each management contract or compensatory plan
required to be filed as an exhibit to this Annual Report on Form 10-K.
127
EXHIBIT INDEX
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
Description
Purchase and Assumption Agreement Whole Bank All
Deposits, among the Federal Deposit Insurance
Corporation, receiver of The First State Bank,
Barboursville, West Virginia, the Federal Deposit
Insurance Corporation and MVB Bank, Inc., dated as of
April 3, 2020
Articles of Incorporation, as amended
Second Amended and Restated Bylaws, as amended
Specimen of Stock Certificate representing MVB
Financial Corp. Common Stock
Form of Subscription Rights Certificate
Description of Securities
10.1†
MVB Financial Corp. 2003 Stock Incentive Plan
10.2†
10.3†
10.4
MVB Financial Corp. 2013 Stock Incentive Plan, as
amended
MVB Financial Corp. 2018 Annual Senior Executive
Performance Incentive Plan
Lease Agreement with Essex Properties, LLC for land
occupied by Bridgeport Branch
10.5†
Employment Agreement of Larry F. Mazza
10.6†
Employment Agreement of Donald T. Robinson
10.7†
Offer Letter for Donald T. Robinson
10.8†
10.9†
10.10†
10.11†
10.12
10.13
10.14
Investment Agreement between MVB Financial Corp.
and Larry F. Mazza
Third Addendum to the Employment Agreement with
MVB Financial Corp. and MVB Bank, Inc. and H.
Edward Dean, III, President and Chief Executive
Officer of Potomac Mortgage Group, Inc.
Fourth Addendum to the Employment Agreement with
MVB Financial Corp. and MVB Bank, Inc. and H.
Edward Dean, III, President and Chief Executive
Officer of Potomac Mortgage Group, Inc.
MVB Financial Corp. Form of Restricted Stock Unit
Grant Notice and Restricted Stock Unit Agreement
Purchase and Assumption Agreement, dated November
21, 2019, by and between MVB Bank and Summit
Community Bank, Inc.
Subordinated Note Purchase Agreement, dated
November 30, 2020, by and among MVB Financial
Corp. and certain qualified institutional buyers
Agreement, dated March 2, 2020, by and between the
Bank, PMG, Intercoastal, H. Edward Dean, III, Tom
Pyne, and Peter Cameron
Exhibit Location
Form 8-K, File No. 000-50567, filed April 3, 2020, and
incorporated by reference herein
Annual Report Form 10-K, File No. 000-50567, filed
March 16, 2015, and incorporated by reference herein
Form 8-K, File No. 001-38314, filed June 22, 2018, and
incorporated by reference herein
Form S-3 Registration Statement, File No. 333-228688,
filed December 6, 2018, and incorporated by reference
herein
Form 8-K, File No. 000-50567, filed March 13, 2017,
and incorporated by reference herein
Filed herewith
Form SB-2 Registration Statement, File
No. 333-120931, filed December 2, 2004, and
incorporated by reference herein
Form 10-K, File No. 001-38314, filed March 8, 2018,
and incorporated by reference herein
Form 8-K, File No. 001-38314, filed February 23, 2018,
and incorporated by reference herein
Form SB-2 Registration Statement, File
No. 333-120931, filed December 2, 2004, and
incorporated by reference herein
Form 8-K, File No. 000-50567, filed March 1, 2021,
and incorporated by reference herein
Form 8-K, File No. 000-50567, filed March 1, 2021,
and incorporated by reference herein
Form 8-K, File No. 000-50567, filed December 3, 2015,
and incorporated by reference herein
Form 8-K, File No. 000-50567, filed March 13, 2017,
and incorporated by reference herein
Quarterly Report on Form 10-Q, File No. 000-50567,
filed July 31, 2017, and incorporated by reference
herein
Quarterly Report on Form 10-Q, File No. 000-50567,
filed July 31, 2017, and incorporated by reference
herein
Form 8-K, File No. 001-38314, filed March 27, 2018,
and incorporated by reference herein
Form 8-K, File No. 001-38314, filed November 22,
2019, and incorporated by reference herein
Form 8-K, File No. 0000-50567, filed November 30,
2020, and incorporated by reference herein
Form 8-K, File No. 000-50567, filed March 3, 2020,
and incorporated by reference herein
21
Subsidiaries of Registrant
Filed herewith
128
23.1
24
31.1
31.2
32.1*
Consent of Independent Registered Public Accounting
Firm
Power of Attorney
Certificate of Principal Executive Officer pursuant to
Section 302 of Sarbanes Oxley Act of 2002
Certificate of Principal Financial Officer pursuant to
Section 302 of Sarbanes Oxley Act of 2002
Certificate of Principal Executive Officer & Principal
Financial Officer pursuant to Section 906 of Sarbanes
Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
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101.LAB
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101.PRE
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Filed herewith
Contained in signature page to this Annual Report on
Form 10-K
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
(*) In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule:
Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic
Reports, the certifications furnished in Exhibits 32.1 hereto are deemed to accompany this Form 10-K and will not be deemed
“filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference
into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by
reference.
(†) Management contract or compensatory plan or arrangement
ITEM 16. FORM 10-K SUMMARY
None.
129
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 9, 2021
MVB Financial Corp.
By:
/s/ Larry F. Mazza
Larry F. Mazza
President, CEO and Director
(Principal Executive Officer)
POWER OF ATTORNEY AND SIGNATURES
Know all persons by the presents, that each person whose signature appears below constitutes and appoints Larry F. Mazza and/
or Donald T. Robinson, and either of them, as attorney-in-fact, with each having the power of substitution, for him or her in any
and all capacities, to sign in his or her name and on his or her behalf, any amendment to this Form 10-K and to file the same,
with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or his substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Larry F. Mazza
Larry F. Mazza, President, CEO and Director
(Principal Executive Officer)
/s/ Donald T. Robinson
Donald T. Robinson, Executive Vice President and CFO
(Principal Financial and Accounting Officer)
/s/ David B. Alvarez
David B. Alvarez, Chairman
/s/ W. Marston Becker
W. Marston Becker, Director
/s/ John W. Ebert
John W. Ebert, Director
/s/ Daniel W. Holt
Daniel W. Holt, Director
/s/ Gary A. LeDonne
Gary A. LeDonne, Director
/s/ Kelly R. Nelson
Kelly R. Nelson, Director
/s/ J. Christopher Pallotta
J. Christopher Pallotta, Director
/s/ Anna J. Sainsbury
Anna J. Sainsbury, Director
/s/ Cheryl D. Spielman
Cheryl D. Spielman, Director
130
Date: March 9, 2021
Date: March 9, 2021
Date: March 9, 2021
Date: March 9, 2021
Date: March 9, 2021
Date: March 9, 2021
Date: March 9, 2021
Date: March 9, 2021
Date: March 9, 2021
Date: March 9, 2021
Date: March 9, 2021
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